Fool's Eye View

[ July 13, 2000 ]

Dividend Reinvestment Plans (DRiPs)

By Nigel Roberts (TMFNigel)

Chippenham, Wiltshire -- Like most small shareholders, I receive regular dividend cheques from the companies that I own. Recently I received a cheque from one my favourite companies for £47.54. OK, that was nice, but what was I supposed to do with it? Should I use it to take my wife out for a slap up meal? Or buy her a new dress, or take a holiday? OK, I know I am a cheapskate! Well, the best thing for me to do with this money is to reinvest it into the market. Over the last five years, if you had two tracker funds, identical except for the fact that dividend income was reinvested in one and dividend income was taken out of the other and spent, the return on the fund with income reinvested would have been 50% higher.

Well, that is OK if you have a tracker fund where you can elect to have the income reinvested, but what do you do with those small dividend cheques that we all receive for the shares in individual companies that we own?

My current solution is to pay the dividend cheques into a nice mutual Building Society savings account and allow them to mount up along with the rest of my "funds waiting for investment ideas" until I make my next share purchase. However, wouldn't it be much better if the dividend had been reinvested back into the company that paid it to me?

There are some companies that do not pay a dividend, believing that it is better for shareholders' funds to remain within the company to be invested to help the company continue to grow. One example of a company that does this is Microsoft (Nasdaq: MSFT). Here at the Fool, we would like to see more companies adopt a no dividend policy, as we think the best place for our money to be invested is often within the business in which we own shares.

There are other ways of reinvesting your dividends back into the companies paying them. Some companies offer a scrip dividend alternative, where you opt to receive extra shares in a company instead of the cash dividend. However, many companies are trying to return value to shareholders through share buybacks, reducing the number of shares in issue, so what is the point of the company then offering to issue more shares? The number of companies offering a scrip alternative is falling, and the abolition of advance corporation tax (ACT) in April last year may hasten the end of scrips for good. The abolition of ACT must encourage companies to find more tax-efficient ways of returning funds to shareholders. This will probably mean an increase in share buybacks, and no sensible company will then want to issue more shares if they have recently been buying up shares in the market for cancellation.

Some companies, which are friendly to small shareholders, have introduced dividend reinvestment plans (DRiPs), where shareholders can opt for shares rather than cash without the company issuing more shares. In this case, the company uses the cash dividend to actually buy shares in the market and then allocate these shares instead of dividends. There is usually a small cost associated with this, around 1%, but this is much cheaper than small shareholders using the cash dividend to buy extra shares for themselves.

There is an ever increasing number of companies in the UK operating these plans, and a quick glance through the DRiP message board enabled me to produce this list -- it is not definitive, and if you know more please do feed it back to the message board:

AEA Technology, Allied Domecq, Aukett Associates, Avis, BOC, Bowthorpe, BP Amoco, BT, BTP, Burmah Castrol, Barclays, BICC, Boots, British Airways, Bryant, Bunzl, Cable and Wireless, Cadbury Schweppes, Capital and Regional Properties, CGU, Cookson, Carlton Communications, Charter, Caradon, Express Dairies, Elementis, Geest, GKN, Glaxo Wellcome, Granada, GRE, Hilsdown, Invensys, Lloyds TSB, Lonmin, Marks & Spencer, Misys, Manchester United, Marconi, Mercury Euro Investment Trust, Mercury Grosvenor I.T., Mercury Keystone I.T., Mercury World Mining, National Westmister Bank, New Look, Ocean Group, P & O, Pearson, Pennon, Pentland, Reckitt Benckiser, Rexam, Rotork, Royal & Sun Alliance, J Sainsbury, Shell, SmithKline Beecham, Smith & Nephew, Stagecoach, Storehouse, Sun Life and Provincial, Safeway, Scottish Investment Trust, Scottish Media, Thames Water, Tomkins, Taylor Woodrow, Whitbread, Wolsey, United Biscuits, Yule Cato & Co.

What we would like to see is these dividend reinvestment plans being adopted by all companies -- in particular all companies in the FTSE 350 Index -- and for them to develop into schemes that would enable shareholders to invest small amounts of money into a company's shares by adding their own cash to the reinvested dividend, thus enabling them to buy small numbers of extra shares without being hit with minimum commission charges from stockbrokers. These DRiP schemes already exist in the US, and as UK companies become more shareholder-friendly, I am sure DRiPs will spread this way. I understand that SmithKline Beecham (LSE: SB.) runs a DRiP fund in the UK that allows its small shareholders to do this, and I imagine their exposure to American shareholder pressure encouraged them to start.

One problem for UK investors is the prevalence of nominee accounts, where the shares are not actually held in your own name; this often makes it impossible for companies to know who their small shareholders are, and so they are not easily able to offer them a DRiP plan. Let us start a Foolish campaign -- we want all companies to start a DRiP fund NOW!

Your thoughts on this to the DRiP Investing discussion board, please.

This article orignally appeared in January 2000.