With the ASX hosting many dividend-paying stocks, Australians have long been able to incorporate dividends into their investing strategy. Many ASX-listed companies including Flagship Investments Limited (ASX:FSI) also offer dividend reinvestment plans, otherwise known as DRIPs, or DRPs.
The Dividend Reinvestment Plan (DRP) is an important tool for shareholders. It allows you to reinvest your dividends back into the company, and receive additional shares in return. Shareholders acquire these shares without paying any brokerage fees. This can be a cost efficient way to grow your investment over time, and can also help you to diversify your portfolio. If you’re a Flagship Investments shareholder, then you may be familiar with our Dividend Reinvestment Plan (DRP) which you can read
How a dividend reinvestment plan or DRIP can work for you
Before jumping into the features and advantages of dividend reinvestment plans, here’s an example of how they can work with a listed investment company that declares a dividend.
Let’s say you own 1,000 shares in a listed company. You have chosen to participate in its DRP so that 100% of your dividends are reinvested. If the company announced a dividend of 10 cents per share then you would expect $100 worth of dividends. If the NTA of the shares was $2.00 per share then the company would issue to you 50 new shares.
However, if the share price is lower than the company NTA (in other words if the shares are trading at a Discount to the NTA) then the company can elect to buy that $100 worth of its shares on the market and issue those to you. In that example if the shares were bought by the company at an average price of $1.70 then the company would issue 58 new shares to you (with a remainder carried forward to the next dividend payment). As you can see in this example you would be getting a few extra shares.
Benefits you and the company
When a company pays dividends to its shareholders, it uses its own cash to fulfil that declaration. On the other hand, if you opt to participate in a dividend reinvestment plan, you will be issued new shares in the company. DRPs enable the company to retain more of its financial assets to invest into the market and grow shareholders’ wealth.
How to Use a DRP to Grow Your Investment
There are a few things to keep in mind when considering a DRP. First, you will want to make sure that the company you are investing in is stable and has a history of paying dividends. Second, you will want to consider the fees associated with the plan and in the case of FSI there are no fees associated with the plan. Some plans may have higher fees than others, so it is important to compare options before choosing one. Finally, dividends are usually franked which means that they are taxed at a lower rate than other types of income, so a DRP can be a great way to reduce your overall tax bill. You will want to consider the tax implications of a DRP and this webpage provides some information about this topic.
The Benefits of a DRP
- It can help you to grow your investment over time.
- It can help you to amplify your portfolio.
- It can be a convenient way to reinvest your dividends.
The Features of a DRP
- Increase your holding
The DRP is a convenient way of increasing your holding of Flagship Investments Ltd shares.
- No additional costs
Shares received under the DRP are free of commission or other transaction costs.
- Update details online
You may elect to participate, vary or cancel your DRP election online
- Participation is flexible
You may apply the DRP to your total holding or to a specific number of shares. For shares not participating in the DRP, dividends will be paid in accordance with your payment instructions.
- Participation is optional
You may join, vary your participation or withdraw from the DRP at any time, subject to adequate notice being given.
- Franking credits still received
DRP participation does not affect eligibility for franking credits.
- Shares rank equally
Shares issued or transferred to you under the DRP rank equally with existing shares from the date of issue or transfer.
- Treatment of residual amounts
The application of the DRP entitlement formula normally results in a residual amount (as dividends paid divided by the Market Price typically result in a residual fraction of a share). The value of that residual is usually carried forward in your DRP Account and added to your next dividend for the purposes of calculating future share entitlements.
- Dividend statement
Dividend statements detailing your dividend, franking credits, shares issued to you under the DRP along with the Market Price and any residual amount will be provided at the time of dividend payment.
- If you have more than one shareholding
You must lodge a separate election for each shareholding registered under different names or holding numbers.
Conclusion
The advantages of using a DRP are clear. By reinvesting your dividends in a cost-effective manner, you can grow your investment over time. Additionally, diversifying your portfolio with a DRP can help reduce risk and ensure that you’re making the most of your investment. If you’re looking for a way to grow your investment and diversify your portfolio, a DRP may be the right choice for you.
Considering the Flagship Investments Limited DRP
This booklet explains the Flagship Investments Limited (or “Company”) Dividend Reinvestment Plan (“Dividend Plan”).
We strongly suggest that you read this booklet carefully before deciding which of the alternatives, or which combination, is most suitable to your circumstances. If you are unclear about the taxation implications for yourself, we recommend that you consult your own accountant or financial adviser.
