If you have recently purchased ASX shares which pay out a dividend, it is likely you have to decide if you should participate in the companies dividend reinvestment plan (DRP).
A DRP allows the share owner to have any dividends automatically reinvested back into the company. In other words, instead of receiving the cash, the investor will receive a small parcel of shares.
Below are some considerations to help make your decision easier.
Considerations
Australia is one of the best countries to be invested in dividend shares, thanks largely to our dividend imputation system. This system essentially means investors only pay their income tax rate on any dividends received, which is in contrast to double taxation systems present in other countries such as the United States.
Now, you must make some considerations prior to deciding to participate in a companies DRP or not. Firstly, if you require the dividend for daily expenses it is probably not best to participate. However, if you plan on reinvesting the cash received from any dividends in shares anyway, a DRP can offers some great benefits.
DRP benefits
Many company DRPs offer shares at a discount which over time can add up significantly. For example, Rural Funds Group (ASX: RFF)currently offers participants a discount of 1.5% to the calculated reinvestment price. For RFF, this reinvestment price is calculated by the volume-weighted average price of shares traded on the ASX during the 20 days prior to the record date. Better than this is the 2.5% discount offered by WAM Capital Limited (ASX: WAM) through its DRP.
Another great benefit is the avoidance of implicit costs such as brokerage. When you participate in a DRP, you don't pay any brokerage. Not paying for brokerage means you can deploy more of your capital into shares and boost your return.
Keeping investing simple is also another great benefit of a DRP. Simply put, it allows you to set and forget. If you think a company is likely to still be around in 10 years, I think the consistency of investing in it every 3, 6 or 12 months through a DRP is great. It requires no further action after setting up and you can sit back and watch your allotment of shares slowly increase over time.
Foolish takeaway
If you are still unsure if you can or should participate in a company's DRP, many also offer the option of partial participation. This option for example allows you to allocate 50% of your dividend to be reinvested in company shares and the other 50% to be received as cash. A great choice for those of us that like to sit on the fence.
