Wouldn’t it be nice if you could buy more of your favourite shares without putting your hand in your pocket? Wouldn’t it be nice if you could buy more shares in a business without having to hand over a portion of your wealth to brokers in commission?
Well, there is a way of doing both of the above, and best of all it requires minimal effort.
Reinvest the profits
Dividend reinvesting is a well-known part of investing. In fact, only by reinvesting your dividends can you achieve the market’s best returns. Many different studies have shown that the market’s best returns come from reinvested dividends as the pound-cost averaging effect turbocharges long-term investment returns.
However, dividend reinvestment can be costly. Some brokers do offer low fixed cost regular dividend reinvestment plans, but the cost of these plans can be high for small-scale investors.
An alternative method is to elect to receive dividends via a script dividend programme.
Script dividends are not as common as they used to be but they still exist if you go looking for them. Most discount online brokers today will pay company dividends in cash as default to save on admin costs and layers of complexity but that does not mean you don’t have the choice.
Take Royal Dutch Shell (LSE: RDSB) for example. In 2015, to help improve cash flows, the company introduced a script dividend option for investors. Under the terms of the script, investors can elect to receive a dividend of equal amount to the cash payout but instead paid in stock. This is a highly effective way to increase your shareholding in the company if you don’t need the cash income immediately and you save on commission costs at the same time.
You do need to pay close attention to the terms of each script dividend policy however, as there may be different rules for each company. With Shell for example, due to tax constraints, the company can only issue A shares. Still, with a dividend yield of 6.8% at the time of writing, Shell’s dividend script is a highly attractive way to increase your holding in the company without having to find a suitable dividend reinvestment programme. When you need the income from your Shell holding, you can always switch back to a cash payout.
For long-term investors who believe in Shell’s outlook this is a great facility. Shell is currently facing headwinds from the low oil price but management has acted quickly to bring down costs and sell off non-core assets. Building a holding in the company now, while the share price is low and the dividend is high, could yield impressive results when the company returns to growth.
Shell isn’t the only FTSE 100 company that offers such a scheme. BP and National Grid offer similar script schemes, and a host of small and mid-cap stocks do as well.
The bottom line
If a company offers a script dividend, it can be an excellent way to boost your holdings in the firm without having to acquire additional shares. Of course, if and how you choose to use the script will depend on your individual circumstances, but it’s a great tool for investors that’s often overlooked.
Make money not mistakes
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Rupert Hargreaves owns shares of Royal Dutch Shell B. The Motley Fool UK has recommended Royal Dutch Shell B. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.