wns
22-09-2005, 12:54 PM
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...
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...