A scrip dividend scheme, or dividend reinvestment plan, is a scheme that enables shareholders to automatically reinvest their dividends into new shares of a company. Shareholders who opt in for a scrip dividend scheme will receive dividends in shares instead of cash.
Companies have this option mainly so that they can raise additional capital from existing shareholders. A scrip dividend scheme also encourages long-term investing.
As an investor, I believe scrip dividends are a great way for investors to reinvest their capital. Here are three reasons why I prefer receiving a scrip dividend over cash dividends.
No. 1: Ability to reinvest dividends at lower-than-market price
Scrip dividends are usually offered at a slight discount to the market price. This is because companies try to incentivise shareholders to opt for a scrip dividend so they can raise more capital in the process.
So, by opting for scrip dividends, shareholders can get more shares than if they simply used a cash dividend to buy shares at market prices.
No. 2: No additional fees
Unlike using cash to purchase new shares in a company, there are no additional fees when you receive a scrip dividend.
Although brokerage and trading fees may seem small, they can add up over time. Shareholders who consistently opt for scrip dividends can accrue a lot of savings over the long term.
No. 3: Enjoy the effects of compounding
Compounding is the process of generating more returns on reinvested earnings. Compound interest enables investors’ earnings to grow exponentially.
Scrip dividends are a perfect way for investors to compound their investments at minimal cost.
The Foolish conclusion
As an investor, I usually opt for scrip dividends whenever possible. Scrip dividends offer the opportunity to add more shares to my portfolio at below market prices and at no additional cost. It also allows my investments to compound over time.
Furthermore, if I’m an existing shareholder of the company, I have already done my research on the company and believe in its long-term value. As such, I am more than happy to continue to reinvest my dividends into new shares of the company.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice.