Cash or DRIP?

Readers have asked me how is it that I have odd lots (<100 shares) in my holdings of First REIT. That, my dear readers, is the result of Dividend Reinvestment Program (DRIP). As the name suggests, instead of taking cash payments for your dividend payouts, you choose to pump in the money back into the stock in exchange for shares. Not all companies have this dividend policy in the Singapore Exchange, in my holdings I have First REIT and OCBC as examples.

The advantage to companies with DRIP policies is that they won't have to give out cold hard cash to shareholders, conserving the cash for other uses. The disadvantage would be that the amount of outstanding shares increases, which might lead to dilution in Earnings-per-Share (EPS), lower dividend payouts in future (assuming no earnings growth) etc.

Advantages to the shareholders on the other hand, are that the shares offered in such programs are discounted from those in the open market, from around 3% for First REIT, to a whopping 10% discount for OCBC! This means that, assuming there's no change in the share price on the open market, you would have reaped a gain more than the cash payment would have been. In addition. this would also allow shareholders to accumulate stocks at a cheaper and faster rate. Faster, as the shares thus accumulated would entitle you to more dividends the next time round. For example, 1000 shares of OCBC would entitle you to 25 DRIP shares, giving you a total of 1025 shares. Future dividend rates would then be based on your 1025 shares instead. Assuming this continues on and on, the compounding rate would ensure high growth before long.

So now the question is, do we go for DRIP? Or would cash be a better option? I would say that it depends on the time frame in question. Personally, as I'm still working, and not financially burdened (kids, housing loan etc), and thus having no need of any excess cash, I would much prefer to participate in as many DRIP as I can, to take advantage of the cheaper prices offered, maximise the growth of my portfolio, and to shorten the time till my financial independence. Likely to continue with this strategy for as long as possible (5-10 years maybe?).