Today, shareholders of Australian and New Zealand Banking Group (ASX: ANZ) will get their fully franked dividends issued to them. Depending on each investor's preference, the dividend of 80 cents per share will either be paid out in cash into a bank account or reinvested under ANZ's dividend reinvestment plan (DRIP). Instead of receiving the dividends in cash, eligible DRIP participants will instead be issued with an equivalent amount of new ANZ shares in lieu of a cash payment. Is this something you should get in on?
What are the benefits of a DRIP?
Most big ASX dividend payers offer some sort of DRIP that eligible shareholders can participate in if they wish. There are a few benefits to participating in a DRIP: many companies either have in the past or do offer a discount on share price (DRIP shares are issued at a below-market price), although this is not as common as it once was. Even if no discount is offered, there is no brokerage payable on DRIP-issued shares (which can save you some valuable cash) and the process is relatively seamless.
In my opinion, the biggest advantage of a DRIP scheme is how it easily enables you to compound the wealth generated from your shares over time, without too much effort (a 'set-and-forget' arrangement). Instead of the temptations of spending your dividends on 'stuff', your returns are automatically put back to work and over time, your dividends will pay dividends and earn you a compounding rate of return (all with no brokerage). You'll still have to pay tax on the dividend amount (there's no free lunch), but DRIPs can be an efficient and transparent way of dividend investing.
What's the catch?
If DRIPs are so wonderful, why doesn't everyone do it? While there are many benefits, there is also some disadvantages to keep in mind. Your DRIP will always purchase shares at the last price before the stock goes ex-dividend. This means that you may be buying additional shares when the market is overpricing your stock, and so your cash might be put to better use somewhere else. Of course, if you're a retiree or someone who relies on dividend income, you may need the cash for your living expenses. There are may factors to consider.
Foolish takeaway
If you're not an active investor or living off your dividend income, DRIPs can be a great way to 'autopilot' your investments and ensure a rising stream of dividends down the road. In my opinion, if your dividend-paying company is a strong and healthy investment, it won't hurt to tick the box on the DRIP offer and lock in a rising dividend income. But if you like picking stocks and want to see your money working as hard as it can, by all means take control of your dividend income and make that happen!
