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Dividend Reinvestment or Direct Credit?

Discussion in 'Shares' started by archangelsupreme, 5th Jul, 2008.

  1. archangelsupreme

    archangelsupreme Well-Known Member

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    7th Sep, 2007
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    Australia
    Which option are people currently selecting when purchasing new shares?

    I'm aware of the advantages of the Dividend Reinvestment but am weary of the fact that I may purchase shares at an unreasonable amount or time in the cycle.
     
  2. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    I think it depends a lot on your strategy.

    If you are after long term growth, reinvest your dividends to get the compounding effect.

    If you have a high LVR and are concerned about margin calls, take the dividends and pay it into your margin loan.

    If you need the cashflow, take the dividends as cash.

    If you are concerned about timing, and beleive that you can pick a better time to enter the market, take the dividends as cash and hold onto it until you are happy to put it back in the market. I wouldn't bother in general - if you are that concerned about the timing (eg buying at the peak of the market), then you would be selling your shares ready to buy back when the market drops ... the impact on your holdings of reinvesting your dividends when the price is high (and subsequently drops) is minimal compared to the effect the drop will have on rest of your shares in that company.

    The only other thing I would suggest is that if you are trying to build up a portfolio of shares and want to reallocate income to invest more in another share, then take dividends as cash and reinvest based on your own criteria.

    In general though I say go for the DRP unless you need the cash.
     
  3. Chris C

    Chris C Well-Known Member

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    Don't DRPs make things complicated when it comes to paying capital gains tax when you sell?
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    They just add more calculations to the whole process. Nothing a simple spreadsheet won't fix.

    (that was a "yes" :rolleyes: )