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Cash excess from DRPs

Discussion in 'Shares' started by JoelVermeer, 11th Oct, 2016.

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  1. JoelVermeer

    JoelVermeer Member

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    Question on Dividend Reinvestment Programs (DRPs), for shares and ETFs:

    Within a DRP, assuming the dividend payment will not buy an integral number of shares, which is usually the case, what happens to the cash excess? So assume the dvidend payment is $103, and the DRP price is $10. Presumably, after having been credited with 10 shares at $10 each, I should be able to see the excess $3 credited as cash somewhere in my brokerage account, right?

    (VHY, IAF, RCB as ETFs if anyone wants concrete tickers to work with)

    Thanks
     
    Last edited: 11th Oct, 2016
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  2. Hodor

    Hodor Well-Known Member

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    On your statement there will be a carry forward balance which will be applied to the next dividend.
     
  3. twisted strategies

    twisted strategies Well-Known Member

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    JoelVermeer ,

    welcome ,

    as Hodor describes that is the USUAL case , BUT some companies ( only a couple i have come across ) now give that small amount back in cash ( to your bank account ) .

    VAS ( which i hold and DRP ) does as precisely Hodor describes , WPL sends cash when the DRP doesn't buy a full share ( only have a small WPL holding currently ) and another ( can't remember which pays xx shares PLUS about $4 in cash as the residual div. ) and QBE only allows DRP on holdings of 100 shares or greater .
     
  4. JoelVermeer

    JoelVermeer Member

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    Thanks for your inputs here, Hodor and TS. Your answers align with what I think should be the case. i.e., one way or another, the cash excess after DRP is still the shareholder’s money, so should be credited to them, in some way.

    However I have received the following note from my broker which says :

    In regards to DRP and rounding, our custodian allocates on a round down basis and I am advised that the custodian does not compensate [us, ie., the broker], and thus our clients, anything on fractions.

    In other words, if there is a remainder of (say) 99% of the DRP reinvestment price left over after purchasing an integral number of shares, that excess apparently just gets creamed off by the custodian. I am tempted to say this is a form of theft, since as a unit/shareholder I haven’t authorised either the broker or the custodian to take this, but I need to do some more homework here first before I get stroppy.

    I contacted ASX and they said the company/ETF provider should define how the cash excess associated with their DRP program are to be distributed/accounted for. So I contacted the provider of one of the ETFs I hold and they said that their DRP should be paid as a fractional amount of ETF units (ie., there is no cash excess, because you end up with a non-integral number of units. Fair enough). I see from your note, TS, that Vanguard has the carry forward balance on their ETFs. Again, I have no issue if this were the case.

    Any advice as to what other avenues of inquiry I should pursue here, before I escalate?
     
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  5. twisted strategies

    twisted strategies Well-Known Member

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    i would consider the use of ( exclusively ) rounding down, unusual , i am aware of some ( nomally ) listed companies that 'average '( round up OR down) to the nearest share .. not so practical on large value ETFs .

    has the ACCC still a policy on this ??

    i remember when 1c and 2c pieces were removed from general circulation , there were some strict guidelines on this ( was working in retail sales back then ) , rounding down on a $40 ( say item ) would certainly come under that guidance if it still is enforced ( big kerfuffle regarding Coles and Woolworth grocery bill tallies at the time ).

    personally i would be inclined to politely ask questions further up the (regulatory ) chain
     
  6. Hodor

    Hodor Well-Known Member

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    You need to read the PDS for each ETF if this is causing you a headache.

    https://www.blackrock.com/au/indivi...-reinvestment-plan-australian-funds-en-au.pdf

    Russell Australian Select Corporate Bond ETF | Exchange Traded Funds | Russell Investments

    In short the DRPs for the ETFs you listed per their PDS documents operate as I stated.

    You can't go into credit on the DRP and these providers don't offer fractional share ownership (I'm not aware of any that do) so they go to the nearest whole unit rounded down and carry forward the remaining balance which is applied to the next dividend payment.

    I am unsure of who you spoke to on the phone, however the PDS's specifically outline how excess cash is handled when there is not enough to purchase a whole share, all money remains yours, none is skimmed. No need to get "stroppy".

    Additionally, DRP information is documented on payment advice statements attained from the share registries online. If you have held these ETFs long enough to have been paid a dividend you will be able to log in and see for yourself.

    If you received that advice from a full service broker and not just someone at the call centre I would be taking a good hard look at what I am getting and if it is good value.
     
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  7. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Yeah, it's all well and good when we're talking about losing between 1c and 4c out of a transaction by rounding ... but that's not scalable to trying to round whole shares when the share price can theoretically be in the thousands of dollars.

    When I used to own IBM shares via their Employee Share Purchase program, they would actually account for fractions of shares, so looking at my last statement, I held 289.688 shares and was issued 1.725 shares via DRP. Share price at the time was $91.38 (this was 2005). Not too many stocks on the ASX which offer fractional shares though.

    We received our DRP statement from WOW the other day and they retain a balance to be carried forward to future dividend payments, which I think is a fair way of doing it.

    Personally, I think the only fair way to do it is to either retain a balance or to pay it out as cash.
     
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  8. twisted strategies

    twisted strategies Well-Known Member

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    carry ( the residual cash ) forward is more usual ( WOW , VAS ,VHY SYI do this )

    less common is the share ( can't remember it off the top of my head ) (but is a more recent purchase ) but the residual ( less than $3 ) was paid direct the bank account plus the DRP shares added

    rounding to the nearest share is fairly rare as well ( as you would guess very cheap shares say under $1 a share ) .

    your IBM experience might be rare on ASX listed shares ( unless held in a fund/super fund )

    good thing IBM make computers could you imaginre trying to calculate the plan in a normal mid-size business say Blackmores .

    of the 3 ETFs the member quotes i only hold VHY , the other two didn't fit my aims when i researched and were eliminated early in the research regime ( well before the PDS read )

    VHY carries forward ( cash towrds the next div.tally )


    Russell Australian Select Corp Bd ETF (RCB.AX)
    -ASX
    20.46 [​IMG] 0.01(0.05%)

    Fund Summary
    The Fund seeks to track the performance of DBIQ0-3 year Investment Grade Australian Corporate Bond Index by investment predominantly in Australian Corporate Fixed income securities. The index filters the largest and most liquid Corporate Fixed income securities and weights them equally upon reconstitution. Derivatives may also be used to a limited extent to obtain or reduce exposure to such securities.

    Top 10 Holdings (66.75% of Total Assets)
    Company
    Symbol % Assets
    Westpac Bkg 3.25% N/A 12.71
    Telstra Corp 7.75% N/A 10.85
    Natl Australia Bk 4% N/A 10.35
    Natl Australia Bk 4.25% N/A 9.86
    Telstra Corp 4.5% N/A 9.03
    Westpac Bkg 7.25% N/A 7.46
    Cmnwlth Bk Of Aust 7.25% N/A 6.49




    iShares Core Composite Bond ETF (IAF.AX)
    -ASX
    106.81 [​IMG] 1.08(1.00%)


    Fund Summary
    In order to achieve its objective the Fund invests primarily in Investment Grade fixed income securities which reflect the minimum quality standard required to be included in the Index, and which are issued by the Australian Commonwealth Government, Australian State-Governments, Supranational and Sovereign agencies and corporate debt issues.


    Top 10 Holdings (24.99% of Total Assets)
    Company
    Symbol % Assets
    Australia(Cmnwlth) 4.25% N/A 4.00
    Australia(Cmnwlth) 4.75% N/A 3.75
    Australia(Cmnwlth) 5.5% N/A 3.14
    Australia(Cmnwlth) 3.25% N/A 3.07
    Australia(Cmnwlth) 4.5% N/A 3.07
    Australia(Cmnwlth) 5.75% N/A 2.96
    Australia(Cmnwlth) 5.25% N/A 2.64
    Australia(Cmnwlth) 2.75% N/A 2.36


    Vanguard Australian Shares High Yld ETF (VHY.AX)
    -ASX
    56.15 [​IMG] 1.56(2.86%)




    could it be an ETF bond focus issue on the carry forward ???