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.   

My Stock Holdings (March 2016)

After a long wait, I can finally sit down and count my gains for the month of March! With the Singapore stock market in the doldrums for the first two months, there were finally some rebound even though I did not enter anything prior to it. However, as I also did not let go of any stock, it meant my portfolio clawed back some gains.

This also highlighted how investing is actually advantageous to constant trading. According to this article, missing just the best ten days of S&P in the period between 1993-2013 will cost the investor a 3.8% drop in annualized returns. While many will argue that trading is better as one can let go of stocks at the highest and buyback at a lower point, I can assuredly say that I neither have the skills nor the time. Hence, as a student and eventually a working adult, passive investing will still be the way to go.

On the matter of dividends, I received a total of $227.42 for the month of March. This amount was disbursed from HPH Trust, SingPost and Karin Tech. Hence for the first three months, the total dividends received comes up to $261.57, a little over a quarter of my dividend goal this year.

Also, I had bought GLP on 31 Mar 2016 for a cost of $1.955. A little high, but through the average of valuation methods which I may subsequently write about,  the fair value price of GLP I came up with was actually $2.42. Coupled with GIC being the majority shareholder, I feel that there is some merit to the purchase of GLP. With the addition of GLP, the breakdown of my portfolio is shown below. Let's hope 2016 is a good year for all in the stock market =)

2015 Investing Report Card

In my previous post, I mentioned that my "financial year" ends on 13 January 2016, since it was the date I started tracking 2015 investment returns. Now that the day had past and I finally handed in my Final Year Project report, I can finally sit down to type out this post!

2015 Annual Return: -10.412% (for year ended 13 Jan 2016, using Excel's XIRR function)

With a portfolio that is down more than 10%, it was definitely not a good year for me. The consolation is that using the same calculation metric, the 2015 return for STI ETF was actually -16.099%. 

Hence comparing my portfolio against the STI index, I had technically "beat the market" for the year of 2015. Since many books had mentioned professional fund managers have trouble beating the market, I take pride that I had achieved the feat in 2015. It was a tough year especially with China's economy not doing well and oil price being so depressed. As a graduating student, I can sense that Singapore's economy is not doing well at all. This is so because of the tight job market available for me. My wish for 2016 is for me to get a job and start my own monthly investment plan, putting a part of my salary in STI ETF. I do not mind that the stock market tanks because over the long term, buying in a bear market inflates your returns. Buy when others are fearful!!

Note: Recently, someone introduced me to Holding Period Return as a way to calculate portfolio return, instead of XIRR. I am still not sure which is more accurate. Hence for 2016, I will keep track of my investments using both methods and observe how far they deviate from each other.


Here are some of the fun facts about my portfolio performance in 2015:

• Dividends are probably the reason why my portfolio managed to outperform STI ETF - receiving $863.19. 

• Dividend yield for portfolio is 4.80%, Excluding stocks that did not give dividend, the yield goes up to 6.17%.

• I'm not a perfect investor. I trade sometimes (or technically, gamble). With 5 sets of Buy-Sell trades, I made a loss of $438.45. Portfolio return would have been better if my hand had not got itchy.

• Narrowly missed losing a whole lot more if I did not sell Ezra in time. Ezra closed at $0.0900 that same day.
  

• 2015 was also a bad year because none of the stocks I bought for investment purposes finished the green. Stocks included K-Reit, k1 Ventures and Straco. The only positive investment which I sold off was Apple Inc, which I bought in 2014 and sold in March 2015. 

2015 was an overall bad year while 2016 remains uncertain and volatile. Within the first 2 weeks, STI had already dropped 8.46% and the future of oil rigs giants KepCorp and SembCorp look threatened. Having started investing in 2011, I have not met any bear market or recession. No one can claim to be "experienced" if he/she have not gone through a financial crisis. Hence I am actually excited for 2016! Bull or bear, I will still be in the market, seeking my private returns. 

My Stock Holdings (December) & Happy New Year 2016!

2015 stock market closed without a bang, neither a plunge. But it's undoubtedly a bad fairly lousy year. Starting the year at 3370.59 and ending it at 2893.19, STI dropped 14.16% excluding dividends. Oil price had bottomed to a 11-year low and does not seem to be recovering any time soon. Relevant companies in the oil industries had taken a hit, in particular Keppel Corp and SembCorp.

In my own portfolio, SingPost dropped almost 8% partly because of its CEO's departure and corporate governance problems. In my previous posts on SingPost, I mentioned how much I admired Wolfgang Baier's leadership in transforming SingPost. Now that he is actually gone, a closer watch on SingPost's performance in e-Commerce will be warranted.

Consistently under-performing stocks in my portfolio will also be reviewed soon. (once I submit my FYP report) These stocks actually include Bank of Ireland (BKIR) and HPH Trust. Since buying them almost 2 years back, they had returned almost zero returns. In fact, accounting for inflation and further brokerage fees and foreign custody fees, they were probably negative returns. In the long term, I am pessimistic about HPH Trust since there is little impetus for the share price. Management guidance of allowing dividend payout to follow cash flow should further compress dividend yield. For Bank of Ireland, there should be a slow recovery of its business towards declaring dividend late 2016 or early 2017. However, holding BKIR incurs foreign custody fee at POEMS and it is very vexing. Given the time, I would love to assess whether switching out BKIR and HPH Trust are preferable. (using capital budgeting concepts I learnt in FIN2004X!)

Rounding the "My Stock Holdings" posts for the year, below is the distribution of my portfolio at the end of December.

I received $150 from k1 Ventures through its capital reduction exercise. Adding it all up for the year, I had received $863.19 in 2015!

Since I will be working in mid-2016, I shall aim to achieve $1000 worth of dividend in 2016! This means putting some portion of salary into the stock market, maybe through dollar-cost averaging of STI ETF! Lastly, I shall write another post regarding my investing performance for 2015 as I started my records on 13 January of last year. Included will be breakdown of my Buys and Sells etc. Since I have not sat down to look at my records, writing that post is equally exciting for me!

Once again, Happy New Year and here's wishing everyone out there a prosperous and joyous year ahead! HUAT AH!

My Stock Holdings (November)

November brought down prices of a lot of my stocks, most notably Singapore Post and ST Engineering. I would probably not average down any time soon unless capitulation takes place. At the meantime, their dividends will keep me satisfied. 

I had also bought k1 Ventures at a price of $0.20 on 10 November. This was prior to the capital reduction exercise conducted by the company, in which it gave out $0.015/share to shareholders. k1 Ventures is a investment company and has a great track record of delivering returns to shareholders. It is a bit of a pity that I had noticed this company so late. Between 30 October 2013 to 29 January of this year, the company had return $0.11 of dividends. That's 50% of the price I paid, excluding any capital gains! A risk involved in buying the stock at such a late stage is that most of the monies made from divestment gains had already been given out, hence returns may not be as great as before. Future investments made by k1 Ventures may not be as successful but given the track record, I am willing to place a small amount of money with them in hope of reaping a good returns. However, writing on hindsight with the price standing at $0.183 now, it is unnerving that the stock seem to drop with everything I might touch. The opposite of Midas Touch, perhaps the market is currently not optimal for new investments despite good fundamentals. 

The pie chart shows the current distribution in my portfolio. In the month of November, I received dividends from Keppel Reit and Singpost. Hence the dividends I had received from start of the year to date is $713.19. 

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! 

My Stock Holdings (October)

Student life is killing me. At my last year of study, who knew things would be so tough. Final Year Projects, meetings upon meetings. Presentations and presentations. Deadlines and more deadlines. Nevertheless for my own sake and maybe to some extent yours, here's my holdings in October 2015.

No change in holdings but it seems that the market is doing well for the last month.

There are no dividends issued for the month of October, therefore it stands at $616.49. 

A number of investment activities in the upcoming month:
Number one is to ballot for some IPO shares of Jumbo. A review of the IPO can be found in Mr IPO's website. I almost always ballot for IPO to sell on the first day unless its a very compelling business. Jumbo does not look to be the exception but I think Jumbo can open at least above $0.30. With only 2 million shares for public subscription, hope is not high to get the shares.

Number two is to indicate to opt for Keppel Reit's dividend in form of shares. I will explain this scheme/decision in the next post, hopefully before the next monthly report.

My Stock Holdings (September)

Have been busy with school work this month due to Final Year Project and job-finding (holy shit!) hence not much time to update. 

I did buy Keppel Reit at $0.945 on 2 September as part of my income stocks. Also, dividends received in the month of September include $50 from ST Engineering and $86.05 from HPH Trust. 

Dividends Year-to-Date: $616.49