your thoughts please on dividend reinvestment plan

[wns]

One of the companies I hold (CIY) is looking at starting a dividend reinvestment plan (DRIP).

I’m trying to decide whether I’m for or against the DRIP being put in place. And if it is put in place anyway, to decide how many (if any) of my dividends to reinvest.

So I would be interested to hear peoples’ thoughts on the pro’s and con’s etc of DRIPs.

I’m thinking out loud here and welcome your comments and if you see holes or errors in my reasoning please let me know…

The way I understand it is that if shareholders take up the DRIP then additional shares get issued and the company in effect retains more of its earnings within the business for reinvestment. Cash in the bank increases but so do the number of shares on issue.

So if you don’t reinvest all your dividends, your % shareholding becomes diluted. This is possibly OK so long as the cash/profits being retained by the company as a result of the DRIP can be reinvested so they earn as much (or more) profit per share as the existing shares. In other words, whether or not, and the extent to which, your EPS is diluted or increased by the DRIP depends on the rate of return the company can earn on the money reinvested under the DRIP. (hope that makes sense)

Also, the decision whether or not you reinvest your dividends would come down to what other investment options you have and the expected rate of return of those options versus the expected rate of return on the reinvested dividends. For example if the share you hold is fully or over priced, you are probably better off investing your dividends elsewhere.

The shares issued under the proposed CIY DRIP will be at no more than a 5% discount to market price.

I welcome your thoughts...

[limegreen]

I understand some companies buy back shares rather than issue new ones (in which case dilution is less of an issue). As a small shareholder, I'm all for DRiPs. They are an excellent way for me to increase my holdings without brokerage and help to compound my returns over time (The dividends I get from all the companies I own combined wouldn't be enough for me to consider buying a new parcel of shares on market). I am not to hold shares that are "fully or over priced", so that is not an issue for me. The only (small) disadvantage I see is that if you decide to exit a stock after it goes ex-dividend and it's too late to withdraw from the DRiP, you either end up with a tiny parcel of shares, or you have to wait for the allocation (in which case the price may drop further).

[Neo-Con]

Drp's are definately the way to go if there is any discount. Some stocks reinvest your dividends at 97.5% of the weighted ave ex-dividends price. This is effectively a rights issue so should always be taken up. However if there is no discount, which is probably more common than not then it is a nil effect decision which you should make depending on things such as current share price, need for cash etc

[rocket science fiction]

the thing i dont like about drips is that yu are forced to buy that company which may not be the best place to invest your money at the time.
if a share is in a downtrend yu probly wouldnt buy it, but if your on a drip yu are.

[Sideshow Bob]

RSF,

Then wouldn't you review your investment??????

SSB

[rocket science fiction]

yeah but sumtimes it culd be a HOLD and not a BUY:D

what if the market conditions at the time mean yu not buying?
what if YU want to chose the best time to buy more?
what if that company is already the max in your poor-tfolio?
what if yu need sum cash?

just sum questions to ponder
persoinally the companys i buy dont even pay divies:D

[wns]

Thanks for the responses so far.

If the DRiP gets the nod (which I suspect it will) I will more than likely reinvest all my dividends under the DRiP. After that, every half year when the dividends are paid I can assess my options at the time.