Over the next few weeks, Commsec estimates that around $24 billion will be paid out by ASX-listed companies as dividends.
Many investors will likely be eagerly awaiting the receipt of the bank cheques or the cash into their accounts so they can reinvest the funds. Others will use the funds as their primary or secondary sources of income, while some investors may see those dividends as extra cash to burn and go shopping.
But what many investors might not know or have forgotten is that they could automatically use their dividends to buy more shares through Dividend Reinvestment Plans – and with the bonus of no brokerage fees.
It’s almost a set and forget strategy – if you don’t have immediate need of the cash that is. Sign up for a company’s DRP and your dividends will instead be used to buy even more shares in the company. You will still have to pay tax on the dividends, but you do still get the benefits of franking credits as well, although you will no longer get the cash.
If you think about it, it makes a lot of sense. Reinvesting your dividends back into the company will mean a higher dividend payment next year and therefore more shares – on and on into the future (all other things being equal).
Here are a few companies that currently offer DRPs.
Woolworths Limited (ASX: WOW) and Wesfarmers Ltd (ASX: WES) also offer DRPs. As does the SPDR S&P/ASX 200 Fund (ASX: STW) which tracks the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO), and Vanguard’s equivalent ETF for the S&P/ASX 300 (Index: ^AXKO) (ASX: XKO) – the V300AEQ ETF UNITS (ASX: VAS).
If you think about the two ETFs in particular – they make for an ideal DRP investment. When the market is high, your DRP will only buy a few shares (units), but when the market is low – such as during the GFC, your portfolio will generally receive much more shares.
That makes it fairly easy for investors to achieve a number of portfolio goals very quickly. Diversification and a very simple investing strategy that can boost your portfolio. Maybe it’;s time to find out if the rest of your stocks offer DRPs?
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Returns as of 6th October 2020
The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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