Q: What is a Dividend Reinvestment Plan (DRP) and how does it work?
A: A DRP allows you to increase your investment in a company over time by automatically reinvesting dividends in new shares rather than receiving the dividends in cash.
Companies that offer DRP may issue shares at a discount to their listed share price at the time.
DRP shares issued are acquired without any brokerage or other transaction costs.
New shares will be listed on the stock exchange and perform on the same basis as other shares in the company.
Even though dividends are paid in the form of new shares, the dividends are still assessed as income in the financial year that the DRP shares are issued.
DRP creates complexity for Capital Gains tax purposes. Shares are issued at the cost base applicable at the time they are issued which makes long term monitoring and calculation of capital gains complex.
Listed companies have the option to retract a DRP at any time so there is no guarantee that you will be able to keep reinvesting your dividends in new shares.
When you buy shares in a company that offers a DRP, you can opt in or out of the arrangement online via the share registry website at any time.