Investment bites: Dividend re-investment
Investing bites is a series of short-one idea post in less than 300 words.
Sometimes dividend is entitled to be reinvested into the company at a share price lower than the market. If applicable, the announcement will be titled: Dividend (with re-investment plan), and as a shareholder, you will be informed by the registry company.
A. Discounted pricing
If the share has gone up sharply since the dividend is declared, you’ll find the premium of reinvestment to be really attractive.
Maybank 2020 reinvestment plan. The market price on 21 Dec is RM8.40, while the offer price is RM7.68. Therefore, you get a discount of 8.57% if you choose to opt-in. Previous years range 5%-14%.
B. Higher return than dividend
Theoretically, buying the company shares at lower than market price means your dividend yield is higher than the shareholders who opt to get the cash return.
In practice, this is not always the case (read below).
A. Fees for reinvestment
You still need to pay Stamp Duty or/and transaction fee. This cost RM10-15 and time (up to 1-hour queue in the post office), and can cost more than any savings you get if you are only entitled to buy a few shares.
To subscribe the shares in Maybank online, the cost is RM13, you need to subscribe to 18 shares just to breakeven the cost.
B. Odd lots
You’re likely entitled to odd lots. This poses a problem if you are planning to sell the shares within a few years. Odd lots of shares have to be transacted through a remisier instead of online trading. The cost of the transaction will be much higher, usually start from RM40. (A possible hack soon on this)
C. Cash flow
You don’t get cash flow from the dividends. This may not be aligned with your overall investment plan.
Dividend reinvestment is mainly meant for big lots or long-long term holding. It’s a game where institutional investors will always win, but sometimes we can ride on that too.