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Investing With The Scrip Dividend Scheme

man and money chart The Scrip Dividend Scheme or formally known as  DRIP (dividend re-investment plan) is a plan that allows shareholders to automatically reinvest dividends and capital gains distributions, thereby accumulating more stock without paying brokerage commissions. Instead of receiving the usual dividend checks, participating stockholders will receive quarterly notification of shares purchased and shares held in their accounts.

Did you see the catch – shareholders? Yeah, it means that you cannot purchase a DRIP – you need to own the shares and opt to have your dividends in shares when the DRIPs are in effect.

In Singapore, DRIP is usually known as Scrip Dividend Scheme, and there are many companies which have adopted the scheme. Some of the companies include: Jardine Matheson (SGX: J36), The Hour Glass (SGX: E5P) and MapleTree Logistics Trust (SGX: M44U).

So why do companies want to undertake an additional step to issue dividends in the form of shares? Let’s take a look at the pros and cons for this scheme:

Advantages of DRIP

  1. As shareholders can opt for dividend payment as cash and/or additional new shares, they would thus have greater flexibility in meeting their investment objectives.
  2. It will also enable shareholders to increase their holdings without incurring additional costs such as brokerage fees, stamp duty or other related costs.
  3. To the extent that shareholders elect to receive new ordinary shares, the company benefits by retaining cash for business growth which would otherwise be payable by way of dividends.
  4. Sometimes, scrip dividends offer the shares at up to 10% discount off market price too.

Disadvantages of DRIP

  1. Investors who decide on cash dividends will lose out as their holdings are increasingly diluted by new shares being issued.
  2. You may be invariably left with odd lots and may lose out if they are rounded down based on the company’s course of action.

Foolish Bottom-Line

Over the past years, more and more companies are taking advantage of this scheme as it helps them to conserve cash for expansion. It encourages long-term investment because investors who truly believe in the company can now participate in its growth and stand to benefit from the allotment of additional shares without incurring additional cost.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.   Motley Fool Singapore contributor James Yeo doesn’t own shares in any companies mentioned.