Owners of Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), AKA Soul Patts, shares now have the option of utilising a dividend reinvestment plan (DRP) following its launch by the company this week.
The century-old investment company's board of directors announced the intention to offer investors the option to participate in the DRP for the 2024 final dividend, which is expected to be paid to eligible shareholders on 8 November 2024.
What is a dividend reinvestment plan?
When a company pays a dividend, it typically pays a cash amount to shareholders based on the number of shares they own.
Companies can decide to provide a DRP where shareholders can choose to receive their dividends in the form of new shares rather than cash.
Some companies allow investors to participate partially in a DRP. For example, shareholders could choose to receive 50% of the dividend in cash and 50% in new shares. Soul Patts says it will allow partial participation.
Why take part in a DRP?
There are a few reasons to consider a DRP.
Soul Patts notes that no brokerage, commission or other transaction costs will be payable by the shareholder to acquire those new shares. That's usually the case with DRP plans.
A lot of DRP plans issue shares with reference to the market share price at the time. However, some businesses can decide to issue the new DRP shares at a discount to the market price. For example, farmland real estate investment trust (REIT) Rural Funds Group (ASX: RFF) has a DRP discount rate of 1.5%.
By participating in the DRP, investors can supercharge their compounding by buying more shares and benefiting from the growth in per-share value as profits and dividends rise.
Is the DRP compelling for Soul Patts shares?
Soul Patts hasn't told investors whether the DRP price will be discounted, but if there is a discount, it could make the DRP very appealing.
For investors wanting to increase their holding of Soul Patts shares, the DRP is an effective method of doing so with no brokerage costs.
However, one of the negatives of taking part in the DRP is that investors don't have any control over the share price they're buying at. The shares could have gone up 20% or down 20% just before the DRP is enacted.
But, Soul Patts shares usually trade somewhat closely to the underlying net asset value (NAV), so I'd suggest investors would be getting a fair price most of the time.
Investors wanting to own more Soul Patts shares could also decide to receive the Soul Patts dividend as cash and then buy more shares on the market when they think the time/price is right.
I'm a big fan of the business, and I think that participating in the Soul Patts DRP would be a good thing. I'm expecting to own shares in this company within my portfolio for decades, so increasing my ownership via the DRP has its merits. I also plan to buy more Soul Patts shares with the money I have saved in the coming years.
