While not offered by all companies, the basic idea behind Dividend Reinvestment Plans (DRPs) is that an investor has the choice of either taking dividends in the form of cash or extra shares to an equivalent amount. Investors should however be aware that the dividend is assessable income regardless of whether they receive it as cash or shares.
So why would an investor elect to participate in a DRP?  The primary reasons for doing so include:

• it is a cost-effective means of increasing ones shareholding, especially for smaller portfolios as the extra shares are issued with no brokerage costs;
• the company may issue them at a small discount to the stock’s current market price; and
• it being a very effective means of forced saving.

Since each dividend reinvestment is a separate share purchase it does however make administration more complicated with good record keeping essential to ensure that the capital gain or loss on each parcel is correctly calculated when the shares are sold.

Finally, investors should also understand that some companies offer DRP’s mainly as a way to preserve cash, not as a convenience to shareholders and that failure to participate in a DRP effectively results in an investor’s ownership interest being diluted unless the company offsets the dilution by buying back shares on-market.

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