Everyone has their own reasons for wanting to earn additional income.
Maybe you’re looking to cover your daily expenses.
Or maybe you are saving up for a major expense sometime down the road.
For those close to retirement, additional income will come in handy when it’s time to enjoy your golden years.
Investing, if done properly, can help you achieve your financial goals.
In particular, receiving dividends from your stocks is a great way to put extra money in your pocket.
At the crossroads of dividend street
In July, the Monetary Authority Singapore (MAS), Singapore’s central bank, called on Singapore banks to cap their dividend payments for 2020.
And that’s not all MAS urged banks to do.
The regulatory authority also nudged our local banks to offer scrip dividends in place of cash dividends.
The reason? To conserve cash and bolster the banks’ reserves.
For investors, we are faced with a choice.
Should we take the cash and invest it somewhere else?
Or should we accept the scrip dividends and add to our current stock position(s)?
Both options have their merits, so let’s illustrate this with an example.
One-up on dividend street
Our in-house math whiz, Royston Yang, did some math that you might be interested in.
Take Oversea-Chinese Banking Corp. Limited (SGX: O39) for instance.
Over the last 10 years, OCBC has periodically given shareholders the choice of choosing between receiving scrip dividends or cash dividends.
Now, let’s consider the period between the end of 2009 until the end of 2019.
Buying 1,000 shares of OCBC at S$8.85 at end-2009 will cost S$8,850, and this will be used as the initial asset value for the purchase.
Let us now take a look at the outcome as of the end of 2019.
Option 1: Did not choose scrip
If you had not chosen scrip at all, your total asset value for OCBC will grow to S$10,980.
For our fellow math geeks, that would be 1,000 shares multiplied by the closing share price of S$10.98 as at end-2019.
At the same time, you would have received a total of S$3,680 in dividends between 2010 and 2019.
If we add these numbers together, the value of your OCBC investment (including the dividend gains) amounts to S$14,660.
That’s the amount you would receive if you did not accept the scrip dividends.
Option 2: Choose scrip
Now, we assume that you have selected the scrip dividends every time OCBC offers it.
If we do the math again, at the end of 2019, the total value of the investment will be S$15,598.71.
This figure can be broken down into two components: total cash dividends received of S$1,888.82 (for all declared dividends in the years that scrip dividends were not offered), and the market value of OCBC’s shares at S$13,710.
Given the two figures, you may ask: why is the market value of OCBC’s shares so much higher at S$13,710 for the DRIP example compared to S$10,980 in the first example?
That’s because the acceptance of scrip dividends has increased the total number of OCBC shares you own over the years.
Assuming all scrip dividends are accepted at the various issue prices set by OCBC for each dividend, you will end up 10 years later with around 249 additional shares of OCBC to add to your original 1,000 shares.
This means that you now own 1,249 shares — or around 25% more than what you started out with back in 2010.
And the great thing is – these extra shares have resulted in higher amounts of cash dividends received over the years, too.
On the dividend street to riches
Some companies have made it easy for investors to accept scrip dividends in lieu of cash.
For instance, OCBC usually offers a 10% discount from the average of its volume-weighted recent shared price.
In this case, accepting OCBC’s scrip option represents a chance for you to “buy” more shares at lower prices.
And that’s not all.
Scrip dividends are also credited to your account without any transaction fees or brokerage commissions.
In short, if you are happy to own more OCBC shares, then scrip dividends offer a fuss-free and expenses-free option to increase your stake in your favourite company.
To be sure, there are downsides that you should take note.
Scrip dividends often end up as odd lots which can be hard to sell later on.
Meanwhile, not every company offers its scrip dividends at a discount.
DBS Group (SGX: D05), for instance, has also offered scrip dividends but astute investors will note that it is cheaper to just buy its shares from the stock market.
In addition, if we accept scrip dividends of a stock that goes on to perform badly — well, we will suffer more for owning more of those shares.
Get Smart: Following the script to your wealth
Beyond the considerations above, we should not lose sight of why we chose to invest.
We should remain true to our north star as we make decisions for our future wealth.
Scrip dividends can be a great way to level-up your dividend income.
Provided, of course, that this option is used on the right stocks.
As an investor, we should always keep our end goal in mind.
Each of us invests for a better financial future.
To help us get to where we want to go, we have to choose the right stock to back.
Therefore, owning the right companies is a key priority.
If we have done our homework buying a stock, then we should be happy to own more of the stock in the future.
As such, the decision around scrip dividends should be straight forward. We should always be happy to accept the scrip dividends (hopefully at a discount!).
Want to know what stocks we like for our portfolio? See for yourself now. Simply CLICK HERE to scoop up a FREE copy of our special report. As a bonus, we also highlight 6 blue chips stocks trading at a 10-year low. But you will want to hurry – this free report is available for a brief time only.
Click here to like and follow us on Facebook, here for our Instagram group and here for our Telegram group.
Disclaimer: Chin Hui Leong owns shares of OCBC and DBS.