DRP Calculations - Maximize your Dividends!

In a previous post, I had talked about the positive and negative aspects of Dividend Reinvestment Plan, or DRP in short. A key positive for DRP is the compounding feature which allows you to reinvest your dividends and snowball your assets. However, in the process subscribing for DRP, some of the dividends will be wasted due to roundoff calculations. This post teaches you how to allocate shares between DRP and cash so as to minimize wastage.

First off, dividends declared. 

Suppose your company has a DRP program and you want to subscribe to it. As an example, Keppel Reit declares a dividend and announces it on SGX website. This dividend consists of a few components such as taxable income, tax-exempt income distribution, capital distribution and other gains.

During my first attempt to claim scrip dividend, I learnt that new shares issued are counted not based on the lump DPU of 1.68 cents but instead, counted separately under each component and then summed together. This presents a problem as roundoff calculations are repeated at each component and it really eats into your allocated dividend. All the more important that you maximize your scrip dividends! 

So how to maximize?

Subscribing to DRP does not deprive you of cash dividend; you can do half-half. Basically in the DRP form you receive, you will be asked to allocate how much of your shares holding to count for cash dividends and how much to count for scrip dividend. 

Here lies the method to maximize your dividends:

1. Allocate the minimum number of your shares holdings to DRP such that the new shares issued to you is the maximum
2. Allocate the remaining shares holdings to receive cash

Example

Below is the Google sheet I created to address the above steps and you can download it here. 

The cells in orange need to be filled up by the user. The dividend structure is that of the example I shown at the top. The issue price of new shares is what you will be paying for using the dividend received. It is usually priced at a discount and announced separately later. In this case, it is $0.9802.

Suppose I have 3000 shares of Keppel Reit and I allocate it entirely to DRP, I will receive 49 new shares in total. However, if i decrease it by 1 share, I will still receive the same amount. Hence your objective is to find out what is the lowest Shares allocated to DRP so that the maximum new shares is still received then assign the remaining to receive cash.

Cost Savings?

Between 3000 shares and 2949 shares (which is the optimal) to DRP, there is an extra $0.85 that can be saved. This may be insignificant but it is a matter of principle to me. For others, that 10 minutes to save this $0.85 is worth it. 

Hopefully this post will save a lot more $0.85 going forward. If you know people doing DRP, do forward this post to them.   

Dividend Reinvestment Plan (DRP)

Recently I purchased the Keppel Reit while in search for good income stock. Admittedly Keppel Reit is not a fantastic Reit to own but I decided forge ahead to buy this stock mainly because of its DRP (Distribution Reinvestment Plan) feature. DRP, simply, is a dividend scheme that allows the investor to claim shares as dividends instead of cash. So what’s the deal about DRP?

Compounding Power + 0 Commission

I had always been a fan of compounding interest because of its power to grow wealth exponentially given the necessary time. Supposed you re-invest all of the dividend back into Keppel Reit, you can double the value within 10 years (at prevailing dividend yield of 7%, constant dividend and price). Receiving cash and not investing it, you will need 14 years to receive to get back the capital. I had tried to “reinvest” my dividends in Singpost before but I stopped doing it because of the commissions needed to buy and sell small lots – roughly around $10. So while many books advocate the need for dividend reinvestment, there is a limitation because of the commissions needed. Hence one of the attractive feature of DRP scheme is that it eliminates commissions from brokerages when you reinvest dividends.

Investing Discipline

Another advantage of DRP is forcing the investor to invest long term. This is one of the main intentions of companies when they offer DRP schemes and it is also my reason to invest with them. When u opt for DRP, the odd lots you receive periodically make it very hard to divest your holdings. It is a strange concept, but personally, by receiving these odd lots, I’d be forced to commit to the company. As a result, I get to reap the results of compounding returns through long term investing. As someone that gets tempted to sell whenever share price is up, this is a very good self-imposed discipline plan.

While I like the idea of DRP, there are many who will do not like DRP. Admittedly there are disadvantages to DRP and here are some of them

Selling is a Problem

While DRP commits you to a company, it also makes the selling process very hard when you decide to take the money elsewhere. Because of the odd lots, you either have to sacrifice the extra commission fee or just keep the odd lots. However, with the scaling down of trading size to 100, keeping odd lots is less costly.

Investing in a wrong company

A huge disadvantage of DRP is actually if you invest in the wrong company, and this is the biggest hurdle I had to clear before I decided to opt for DRP. Suppose I invested in 1000 shares of Keppel Reit for $1 per share. When it announces dividend of $0.017 per share, I get 17 shares at the price suppose the issued share is also at $1. If the share price tanks to $0.80 1 year later, I actually will have a 20% capital loss on that dividend compared to 0% if I opted for cash! This is the scariest part of DRP that you will have to consider before opting for it.

In this case however, I reasoned that I want to opt for DRP because I see the viability of the trust in the long term. Also, the regular dividends that Keppel Reit issue are very beneficial in terms of compounding power. So I feel that in the long term, the compounding effect will overweigh capital loss notwithstanding the fact that depressed share price will have chance to recover in the long term. In addition, when prices are depressed you get to receive more shares as dividend assuming dividends are CONSTANT.

Having said my piece, what are your thoughts to DRP? Will you subscribe to it given the option? Will you specially hunt for companies that have DRP? Leave your comments!