What is a dividend reinvestment plan?

Dividend reinvestment plans allow you to increase your investment in a company over time by automatically reinvesting cash dividends in new shares rather than receiving the dividends in cash.

Companies that offer dividend reinvestment plans allow shareholders to reinvest some or all of their dividends in new shares, which may be issued at a discount to their listed share price at the time.

Similarly, A-REITs and exchange traded funds may offer unit holders the chance to participate in distribution reinvestment plans, automatically using their cash distributions to buy additional units in the fund.

Dividend reinvestment plans and distribution reinvestment plans are both known as DRPs.

 

How do DRPs work?

When you buy shares in a company or units in a fund that offers a DRP, you will be contacted and asked whether you wish to participate in the plan and advised how to go about doing so.

You can opt in or out by completing a simple DRP form and returning it to the share registry and you can also change your preferences online through the share registry website.

You don’t have to pay any brokerage, commission, stamp duty or other transaction costs for new shares, which are automatically issued under a DRP. Your new shares will be listed on the stock exchange and rise or fall in value the same as other shares in the company.

Companies and funds have the option to retract a DRP at any time so there is no guarantee that you will be able to keep reinvesting your dividends or that you will receive future dividends at all.

 

What are the benefits of DRPs?

A DRP can be beneficial if you’re looking to buy more shares in a company by dollar cost averaging, which can help reduce risk by ensuring that you do not purchase all your shares when the share price is high.

This can also help you grow your portfolio because you will be buying more parcels of shares or units and increasing the size of your investment in a particular company or fund you already hold.

Another benefit of DRPs is that you can earn compound interest – effectively earning interest on interest - in the form of dividends or distributions which will boost your returns in the long run.

You might also like...

How are dividends taxed?

What you'll learn:
  • What income is taxed
  • How the tax scales work
  • How share dividends are taxed
Written for:Beginner | Intermediate

What to consider before you sell shares

What you'll learn:
  • When is the right time to sell?
  • Tax and cost implications
  • Market opportunities
Written for:Beginner | Intermediate

How do franking credits work?

What you'll learn:
  • Definition of franking credits
  • Excess imputation credits
  • Franking credits case study
Written for:Intermediate

Any securities or prices used in the examples given are for illustrative purposes only and should not be considered as a recommendation to buy, sell or hold. Past performance is not indicative of future performance. This information is not advice and has been prepared without taking account of the objectives, financial or taxation situation or needs of any particular individual. For this reason, any individual should, before acting on this information, consider the appropriateness of the information, having regards to the individual's objectives, financial or taxation situation and needs, and, if necessary, seek appropriate professional advice. Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 (CommSec) is a wholly owned but non-guaranteed subsidiary of Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and a Participant of the ASX Group and Chi-X Australia.

 

Disclaimer

This site is directed and available to and for the benefit of Australian residents only. © Commonwealth Securities Limited ABN 60 067 254 399 AFSL 238814 ("CommSec") is a wholly owned, but non guaranteed, subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124 AFSL 234945 and both entities are incorporated in Australia with limited liability.

By clicking on the "Download the CommSec App" buttons above, you will be directed to itunes.apple.com or play.google.com. These sites are not affiliated with CommSec and may offer a different Privacy Policy and level of security.

Top