Should you reinvest your dividends?

What is a dividend reinvestment plan? And should I use one?

a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

Whether or not you should reinvest dividends is a question that will cross the mind of almost every ASX investor who builds a reasonable diversified share portfolio of say 15 stocks or more.

Assuming most of those shares pay dividends, it's likely a couple of them will offer dividend reinvestment plans. Some more well known businesses to offer reinvestment plans include Commonwealth Bank of Australia (ASX: CBA), Woolworths Limited (ASX: WOW), Magellan Global Trust (ASX: MGG), Challenger Ltd (ASX: CGF), Macquarie Group Ltd (ASX: MQG) and Dicker Data Ltd (ASX: DDR).

So what is a dividend reinvestment plan (DRIP)?

A company can offer eligible shareholders the right to reinvest dividends to acquire new shares in the company, rather than receiving a cash credit to their nominated account. The new shares will be allotted on top of the original holding.

For example, if your dividend is $100 plus full franking credits and the dividend reinvestment plan price is $10 per share, you will be allocated another 10 shares to your existing holding. In addition, you will still be eligible to claim the franking credit reductions or refunds when completing your annual tax return.

Advantages of a DRIP

  • There's no brokerage incurred on a DRIP, therefore it's a cost efficient way to reinvest small amounts without a standard brokerage fee between $10–$20. This may not sound like much, but over quarterly dividend payments (for example) that could be up to $80 a year in savings.
  • The biggest advantage of a DRIP is that companies will sometimes offer the shares at a discount to calculated weighted average market price. For example, the Magellan Global Trust offers a whopping 5% discount to the weighted average unit price. More commonly, companies such as Woolworths or CBA may offer discounts between 1%–2% to a volume-weighted average price over a fixed period of around a week, usually up to the record date. Not all companies such as Macquarie will offer a discount though. Generally, where a company offers a discount it's worth ensuring you're satisfied the company is not offering the discount for disingenuous reasons; for example, if it has too much debt and needs to preserve cash. In that instance, you may want to consider selling your shares entirely.
  • The other advantage is that, assuming you own shares in a company growing in value over time, then a DRIP allows you to enjoy the benefits of compounding returns.
  • For example, if you had received a $500 quarterly dividend from a modest Dicker Data shareholding worth around $22k in March 2019 and reinvested the proceeds at $3.09 per share, you'd have received an additional 162 shares. Less than 3 months later though the shares are worth $5.50 to mean you'd have made a $390 capital gain just on the amount reinvested in one quarter. While a $390 capital gain is not going to change your life, in the context of a DRIP in less than 3 months it shows the power of compounding—but only if you own the right businesses.
  • Also remember that when the next dividend payment is made in June, you have an additional 162 shares eligible to collect the 5 cents per share dividend payments. This would only be an additional $8 or so, but shows the compound or multiplier effect in action.
  • The key takeaway is that whether you use a DRIP or not is irrelevant, compared to the performance of the stock. For example, if you use a DRIP and the stock falls in value because the company is a dud, then you'd have been better off collecting the cash.

Disadvantages of DRIPs 

  • Cash is king and you may prefer to collect it to diversify your investments or to just save for a rainy day.
  • Some companies offer DRIPs at a discount as they have too much debt or cannot really afford their payout ratios in the first place. So don't participate unless you're confident in the company's motives.
  • Companies like Magellan Global Trust or other funds managers will incentivise you to participate with huge discounts, as they're in the actual business of asset accumulation themselves. For example, they'd rather keep the cash to invest and allocate you more units as this puts the power of compounding on their side. This is not necessarily a bad thing, but something to keep in mind.
  • For me, the biggest disadvantage of a DRIP is the more onerous record keeping when it comes to calculating final income tax returns of capital gains bill. For example, all reinvestments create new potential new tax liabilities. Therefore, unless you're a committed part-time or full-time investor prepared to put a lot of time into the administration of your portfolio or you have some portfolio administration software (such as Sharesight), you're probably better off just taking a cash payment. Even something like Sharesight still requires time consuming manual entries of reinvestments to keep proper records.

Overall, DRIPs are probably worth participating in, assuming you're in high-quality companies only and are prepared to take on the additional administration around them. Understandably, a lot of people will not fancy the extra admin.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for over ten years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the 'five best ASX stocks' for investors to buy right now. We believe these stocks are trading at attractive prices and Scott thinks they could be great buys right now...

See The 5 Stocks *Returns as of 7 February 2025

Motley Fool contributor Tom Richardson owns shares of Challenger Limited, Dicker Data Limited, and Macquarie Group Limited. The Motley Fool Australia owns shares of and has recommended Challenger Limited and Dicker Data Limited. The Motley Fool Australia has recommended Macquarie Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

ASX shares Business man marking buy on board and underlining it
Broker Notes

Top brokers name 3 ASX shares to buy next week

Brokers gave buy ratings to these ASX shares last week. Why are they bullish?

Read more »

I young woman takes a bite out of a burrito n the street outside a Mexican fast-food establishment.
Opinions

As the Guzman y Gomez share price drops 14% on results, what should investors do?

Is the Mexican restaurant stock’s valuation still too spicy?

Read more »

A woman sits in a cafe wearing a polka dotted shirt and holding a latte in one hand while reading something on a laptop that is sitting on the table in front of her
Share Market News

Bank stocks tanked and telcos rose amid the ASX 200 losing 3% last week

Why did ASX 200 financial shares fall 7.49% while communications shares lifted 1.62%?

Read more »

Smiling couple looking at a phone at a bargain opportunity.
Opinions

Near 52-week lows, are these ASX 300 shares now unmissable bargains?

Are these stocks at valuations that are too good to ignore?

Read more »

A businessman hugs his computer and smiles.
Opinions

If I could only buy and hold a single ASX stock right now, this would be it

This business has a lot of positives.

Read more »

A woman walks along the street holding an oversized box wrapped as a gift.
Best Shares

Top ASX shares to buy following earnings surprises

Who doesn't love a surprise?

Read more »

A runner high-fives as he crosses the finish line in pole position
Share Gainers

Here are the top 10 ASX 200 shares today

It was a woeful end to a woeful week this Friday for ASX investors.

Read more »

Investor looking at falling ASX share price on computer screen
Earnings Results

2 ASX All Ords shares crashing 16%+ on earnings updates

It's a red day for the market on Friday.

Read more »