What is a dividend reinvestment plan?

Dividend reinvestment plans allow you to increase your investment in a company over time by automatically reinvesting cash dividends in new shares rather than receiving the dividends in cash.

Companies that offer dividend reinvestment plans allow shareholders to reinvest some or all of their dividends in new shares, which may be issued at a discount to their listed share price at the time.

Similarly, A-REITs and exchange traded funds may offer unit holders the chance to participate in distribution reinvestment plans, automatically using their cash distributions to buy additional units in the fund.

Dividend reinvestment plans and distribution reinvestment plans are both known as DRPs.

How do DRPs work?

When you buy shares in a company or units in a fund that offers a DRP, you will be contacted and asked whether you wish to participate in the plan and advised how to go about doing so.

You can opt in or out by completing a simple DRP form and returning it to the share registry and you can also change your preferences online through the share registry website.

You don’t have to pay any brokerage, commission, stamp duty or other transaction costs for new shares, which are automatically issued under a DRP. Your new shares will be listed on the stock exchange and rise or fall in value the same as other shares in the company.

Companies and funds have the option to retract a DRP at any time so there is no guarantee that you will be able to keep reinvesting your dividends or that you will receive future dividends at all.

What are the benefits of DRPs?

A DRP can be beneficial if you’re looking to buy more shares in a company by dollar cost averaging, which can help reduce risk by ensuring that you do not purchase all your shares when the share price is high.

This can also help you grow your portfolio because you will be buying more parcels of shares or units and increasing the size of your investment in a particular company or fund you already hold.

Another benefit of DRPs is that you can earn compound interest – effectively earning interest on interest - in the form of dividends or distributions which will boost your returns in the long run.