Dividend reinvestment scheme

MrWizard

Hello,

I've just discovered that you can enroll in a dividend reinvestment scheme to save in dealing fees, stamp duty ... etc.

I'm currently with Halifax and they said it was not possible to do this as only registrars are able to process a scrip dividend. They only offer nominee accounts so all the dividends are issued to them and they process according to my instructions.

Assuming this is correct I guess I have to move providers, not a big deal I guess even though it will cost a little.

What is my best move here?


Thanks

Tom99

[FONT=Verdana, sans-serif]With Halifax you can also use the regular investment option to manually reinvest a dividend for a fixed £2 dealing fee no matter how large the dividend is. I use it to reinvest corporate bond dividends.[/FONT]
[FONT=Verdana, sans-serif]The downside is its not live trading and you have to select one of the 4 or so days a month they will deal.[/FONT]

Joe_Bloggs

How trivial are your dividends when compared to the trading costs of instantly reinvesting them ?
It may be a sensible ploy to collate other dividends until you can get the most out of a future investment transaction given the cost often applied to investment sums.
J_B.

Tom99

Joe_Bloggs wrote: »

How trivial are your dividends when compared to the trading costs of instantly reinvesting them ?
It may be a sensible ploy to collate other dividends until you can get the most out of a future investment transaction given the cost often applied to investment sums.
J_B.

[FONT=Verdana, sans-serif]Automatic dividend reinvestment at Halifax is 2% do dealing on a £10 dividend would only be 20p.

[/FONT] [FONT=Verdana, sans-serif]The max dividend reinvestment deal cost is £12.50 but you can cap that at £2 by using the regular investment option for a one off deal each time.

[/FONT] [FONT=Verdana, sans-serif]So if your dividends are over £100 its cheaper to use the regular investment method. [/FONT]

System

It may be hard to find a broker that offers scrip dividends rather than a dividend reinvestment plan. TD Direct used to offer scrip dividends but they scrapped it, and I do not recall receiving a scrip dividend!

Joe_Bloggs

@Tom99
Paying an instant 2% penalty to reinvest is not a trivial matter given the low interest rate regime and the high inflation rate and the likely modest dividend forecasts. You would not contemplate paying 2% if you were investing new capital.
J_B.

Tom99

Joe_Bloggs wrote: »

@Tom99
Paying an instant 2% penalty to reinvest is not a trivial matter given the low interest rate regime and the high inflation rate and the likely modest dividend forecasts. You would not contemplate paying 2% if you were investing new capital.
J_B.

[FONT=Verdana, sans-serif]I agree its not a trivial %age on a normal size new investment and you would hope for a lot less.[/FONT]
[FONT=Verdana, sans-serif]But if your dividend is £50 then paying £1 to invest it does not make it sound so bad.[/FONT]
[FONT=Verdana, sans-serif]I would gladly pay less than £1 but can you suggest how that can be done?[/FONT]
[FONT=Verdana, sans-serif]You can cap the deal fee at £2 with the Halifax regular investment option so if your dividend is £500 then £2 = 0.4%[/FONT]

bowlhead99

Tom99 wrote: »

[FONT=Verdana, sans-serif]I agree its not a trivial %age on a normal size new investment and you would hope for a lot less.[/FONT]
[FONT=Verdana, sans-serif]But if your dividend is £50 then paying £1 to invest it does not make it sound so bad.[/FONT]
[FONT=Verdana, sans-serif]I would gladly pay less than £1 but can you suggest how that can be done?[/FONT]

Yes, paying a pound to get £50 into the investment market doesn't seem so bad, because what can you buy for a pound these days eh.

But, 2% is an expensive fee to pay to deploy money so the logical thing to do is to see whether you really do need to get that money deployed. What are you giving up if it sits idle instead.

Simple rule of thumb is to say my investments might give me a total return of 6% a year, which is conveniently half a percent per month.

So if I don't deploy the £50 right now I will be missing out on a total return of 25p a month on the uninvested £50. Do I really want to spend £1 now to save 25p a month? Only if I couldn't throw that money into some other investment that I'm already paying for, within the next four months. £50 of idle cash is not at all so urgent that I need to spend £1 or £2 right now to get it invested.

Clearly if you have a £500 dividend which is "costing you" £2.50 a month in missed growth if you keep it in the cash account, better to spend £2 and get it invested. And if the £50 dividend was from the only income-producing share you had, and you weren't putting any new money into the account for another year (or ever), then you might as well spend £1 dividend reinvestment fee to get access to the £2, £3 or £4 investment returns you might be going to get on a £50 investment over the year to come.

Also, beware the actual share price. Say the dividend reinvestment fee is minimum £1 on your £50 being received. But the share price is £24.51. So with your £50 reinvestment money you can't afford 2 shares at £24.51 each plus £1 dealing fee, because that's £50.02. (I'm conveniently ignoring stamp duty too...). So in that situation, you only get to buy 1 share with your dividends proceeds, for an investment value of only £25.01 at a cost of £1. "Screw it, it's only a pound", you think to yourself as you spend 4% to invest a small amount of money -still leaving about £24 in the account unspent

I would gladly pay less than £1 but can you suggest how that can be done?

No, not unless you can find a broker operating on a small percentage basis with no minimum. The other option is give up on holding shares electronically through a broker's nominee account, and just hold paper shares, being on the company's share register on your own name, and able to opt into their in-house drip or scrip schemes. Of course, that means you have to take good care of the certificates and will typically take longer, (or have to spend more, or both) to deal in the shares in the future.

Tom99

bowlhead99 wrote: »

Yes, paying a pound to get £50 into the investment market doesn't seem so bad, because what can you buy for a pound these days eh.

But, 2% is an expensive fee to pay to deploy money so the logical thing to do is to see whether you really do need to get that money deployed. What are you giving up if it sits idle instead.

Simple rule of thumb is to say my investments might give me a total return of 6% a year, which is conveniently half a percent per month.

So if I don't deploy the £50 right now I will be missing out on a total return of 25p a month on the uninvested £50. Do I really want to spend £1 now to save 25p a month? Only if I couldn't throw that money into some other investment that I'm already paying for, within the next four months. £50 of idle cash is not at all so urgent that I need to spend £1 or £2 right now to get it invested.

Clearly if you have a £500 dividend which is "costing you" £2.50 a month in missed growth if you keep it in the cash account, better to spend £2 and get it invested. And if the £50 dividend was from the only income-producing share you had, and you weren't putting any new money into the account for another year (or ever), then you might as well spend £1 dividend reinvestment fee to get access to the £2, £3 or £4 investment returns you might be going to get on a £50 investment over the year to come.

Also, beware the actual share price. Say the dividend reinvestment fee is minimum £1 on your £50 being received. But the share price is £24.51. So with your £50 reinvestment money you can't afford 2 shares at £24.51 each plus £1 dealing fee, because that's £50.02. (I'm conveniently ignoring stamp duty too...). So in that situation, you only get to buy 1 share with your dividends proceeds, for an investment value of only £25.01 at a cost of £1. "Screw it, it's only a pound", you think to yourself as you spend 4% to invest a small amount of money -still leaving about £24 in the account unspent

No, not unless you can find a broker operating on a small percentage basis with no minimum. The other option is give up on holding shares electronically through a broker's nominee account, and just hold paper shares, being on the company's share register on your own name, and able to opt into their in-house drip or scrip schemes. Of course, that means you have to take good care of the certificates and will typically take longer, (or have to spend more, or both) to deal in the shares in the future.

[FONT=Verdana, sans-serif]Yes I agree with all of that. The way I also look at it is that if I want dividends to roll up in the same share there is no real alternative. If the £50 div was say 2% of the share value then only being able to reinvest £48 makes the div 1.96%, that does not make it sound so bad. [/FONT]

grey_gym_sock

if you want dividends reinvested in the same share, then i agree your options are a bit limited.

incidentally, not being able to access a company's own dividend reinvestment scheme is not always a disadvantage. if it's a company scrip scheme, it will (always, i think) have no charges, and it avoids paying stamp duty. but if it's a company drip scheme, you do pay stamp duty, and there will also be a dealing charge (which will be described as "cheap", but may not be cheap, e.g. compared to your broker's drip scheme).

but suppose you are prepared to save up your dividends in your broker account, until you have a sensible amount to reinvest in something (not necessarily into the same share). how often should you be reinvesting?

bowlhead's estimate of 6% returns being lost while your cash isn't invested - the "cash drag" - is 1 piece of data we need to use. (call this rate r ... e.g. r = 0.06.)

another is the cost of each reinvestment, e.g. £2 if you're using halifax's "regular" dealing facility. (call this cost c ... e.g. c = 2.)

the last piece of data we need is the amount of dividends you receive in the account per year. (call this y ... that's in £ per year.)

we want to know how often you should be reinvesting your collected dividends per year. (call this x ... that's in times per year.)

what is the optimal value of x, in order to minimize costs? specifically, we want to minimize the total for 2 costs, dealing commissions + cash drag. (we can ignore other costs, such as stamp duty and bid-offer spread, because they are not affected by how often you reinvest dividends.)

total costs (which we'll call t) = dealing commissions + cash drag

dealing commission is c each time, and you're dealing x times a year, so in a year you pay a total of c times x ... so that's: cx

cash drag actually depends on exactly when the dividends arrive. but to simplify, we'll assume they arrive at a steady rate throughout the year. so just after each reinvesment, you have 0 cash (also ignoring amounts of cash too small to buy 1 share) and the amount you reinvest each time, given that you have a total of y dividends per year, and reinvest x times per year, is y/x. so the cash level varies between 0 and y/x, and on average (assuming steady arrival of dividends) it's y/2x, which makes the cost of "cash drag" over a year ry/2x.

putting that together, we have:

t = cx + ry/2x

in that formula, c, r and y are known (e.g. c = 2, r = 0.06, and y = your total dividends per year).

we want to know the optimal value of x (reinvestment per year) to minimze t (total costs).

i hope you remember your GCSE/O-level maths! if you do, you'll know it's time to differentiate ... which give us:

dt/dx = c - ry/2x^2

the minimum value of t is found where its derivative is 0, so we need to solve this:

c - ry/2x^2 = 0

which is simple algebra ...

c = ry/2x^2

x^2 = ry/2c

x = sqrt(ry/2c)

solved! so now we just fill in the values of r, y and c, and calculate that square root.

if we use r = 0.06 (which is reasonable), and c = 2 (which is for halifax ... other brokers will vary), then we get:

x = sqrt((0.06)y/2(2)) = sqrt((0.015)y)

e.g. if you have £1000 dividends per year, that gives sqrt((0.015)(1000)) = sqrt(15) = 3.9 ... so about 4 times a year is optimal.

or if you have £100 dividends per year, it gives sqrt((0.015)(100)) = sqrt(1.5) = 1.2 ... so slightly less than once a year.

and so on.

this is all assuming you are not adding new money to the account. if you are adding money, then mopping up any uninvested cash from dividends can be done at the same time.

Tom99

grey_gym_sock wrote: »

if you want dividends reinvested in the same share, then i agree your options are a bit limited.

incidentally, not being able to access a company's own dividend reinvestment scheme is not always a disadvantage. if it's a company scrip scheme, it will (always, i think) have no charges, and it avoids paying stamp duty. but if it's a company drip scheme, you do pay stamp duty, and there will also be a dealing charge (which will be described as "cheap", but may not be cheap, e.g. compared to your broker's drip scheme).

but suppose you are prepared to save up your dividends in your broker account, until you have a sensible amount to reinvest in something (not necessarily into the same share). how often should you be reinvesting?

bowlhead's estimate of 6% returns being lost while your cash isn't invested - the "cash drag" - is 1 piece of data we need to use. (call this rate r ... e.g. r = 0.06.)

another is the cost of each reinvestment, e.g. £2 if you're using halifax's "regular" dealing facility. (call this cost c ... e.g. c = 2.)

the last piece of data we need is the amount of dividends you receive in the account per year. (call this y ... that's in £ per year.)

we want to know how often you should be reinvesting your collected dividends per year. (call this x ... that's in times per year.)

what is the optimal value of x, in order to minimize costs? specifically, we want to minimize the total for 2 costs, dealing commissions + cash drag. (we can ignore other costs, such as stamp duty and bid-offer spread, because they are not affected by how often you reinvest dividends.)

total costs (which we'll call t) = dealing commissions + cash drag

dealing commission is c each time, and you're dealing x times a year, so in a year you pay a total of c times x ... so that's: cx

cash drag actually depends on exactly when the dividends arrive. but to simplify, we'll assume they arrive at a steady rate throughout the year. so just after each reinvesment, you have 0 cash (also ignoring amounts of cash too small to buy 1 share) and the amount you reinvest each time, given that you have a total of y dividends per year, and reinvest x times per year, is y/x. so the cash level varies between 0 and y/x, and on average (assuming steady arrival of dividends) it's y/2x, which makes the cost of "cash drag" over a year ry/2x.

putting that together, we have:

t = cx + ry/2x

in that formula, c, r and y are known (e.g. c = 2, r = 0.06, and y = your total dividends per year).

we want to know the optimal value of x (reinvestment per year) to minimze t (total costs).

i hope you remember your GCSE/O-level maths! if you do, you'll know it's time to differentiate ... which give us:

dt/dx = c - ry/2x^2

the minimum value of t is found where its derivative is 0, so we need to solve this:

c - ry/2x^2 = 0

which is simple algebra ...

c = ry/2x^2

x^2 = ry/2c

x = sqrt(ry/2c)

solved! so now we just fill in the values of r, y and c, and calculate that square root.

if we use r = 0.06 (which is reasonable), and c = 2 (which is for halifax ... other brokers will vary), then we get:

x = sqrt((0.06)y/2(2)) = sqrt((0.015)y)

e.g. if you have £1000 dividends per year, that gives sqrt((0.015)(1000)) = sqrt(15) = 3.9 ... so about 4 times a year is optimal.

or if you have £100 dividends per year, it gives sqrt((0.015)(100)) = sqrt(1.5) = 1.2 ... so slightly less than once a year.

and so on.

this is all assuming you are not adding new money to the account. if you are adding money, then mopping up any uninvested cash from dividends can be done at the same time.

[FONT=Tahoma, sans-serif]Ok that's great. I have added “x = sqrt((0.06)y/2(2)) = sqrt((0.015)y)” to my spreadsheet but the answer is coming out as:

[/FONT] “[FONT=Tahoma, sans-serif]Geez 20p is 20p”

[/FONT] [FONT=Tahoma, sans-serif]What do I do now? Is there a further adjustment I can make to the formula to make it work properly?[/FONT]