Every now and then, companies may offer the option for shareholders to select scrip dividends in lieu of cash dividends.
A scrip dividend offers the shareholder new shares in the company rather than cold, hard cash.
An example of a blue-chip company that has been offering the option to choose scrip is OCBC Ltd (SGX: O39).
For its 2019 interim dividend of S$0.25 per share, OCBC issued new shares at S$9.57.
This offer was a discount of around 9% off the market price of the shares on the date of the announcement (28 August 2019) of S$10.51.
However, for OCBC’s 2019 final dividend of S$0.28 per share, the scrip dividend option was not available.
Recently, another blue-chip company, CapitaLand Limited (SGX: C31), proposed a scrip dividend scheme to be applied to its first and final 2019 dividend of S$0.12 per share.
It was also stated that the issue price of the new scrip shares shall not be set at a discount of more than 10% of the average volume-weighted average price (VWAP) of the shares traded between the ex-dividend date and the dividend record date.
Raffles Medical Group (SGX: BSL) has also been applying its scrip dividend scheme to both its interim and final dividends, with the final issue price of new shares usually being a 10% discount to the VWAP.
With the prevalence of such scrip dividend options, should investors select cash or scrip?
The power of compounding
By accepting scrip, you will be receiving more shares of the company that you already own.
Over time, by accepting many rounds of scrip dividends, you can slowly grow your stake in the company.
These share dividends end up giving you even more dividends over time, allowing the compounding effect to take place.
Say you start with 1,000 shares and receive scrip dividends of 10 shares. These new shares bump up your total stake to 1,010 shares.
The following year, the dividends declared by the company will be computed based on the higher level of 1,010 shares, providing you with even more shares should you once again select scrip.
This compounding effect can be further multiplied if the company declares higher dividends on a year on year basis.
You will be thus enjoying the best of both worlds — a rising dividend per share, as well as a growing share base with which to calculate your dividends on.
Benefits of accepting scrip
There are also several benefits relating to the acceptance of scrip dividends.
The first is the discount to the VWAP, as mentioned earlier. This discount could be as high as 10% and allows you to receive more shares at a lower computed share price.
For companies whose share prices stay stubbornly high without falling, accepting the scrip option represents a chance for you to “buy” more shares at lower prices.
Furthermore, scrip dividends are also credited to one’s account without any transaction fees or brokerage commissions.
If you had to buy shares from the stock market, brokerage and other fees will be incurred, thus increasing the cost of your purchase.
Scrip dividends essentially offer both a fuss-free and expenses-free option to increase your stake in your favourite company.
Get Smart: Check up on the business
However, we must state an important caveat.
As an investor, you should check on the health of the business before accepting scrip over cash.
If the business is in trouble and is issuing scrip dividends to conserve cash, you may wish to think twice about accepting shares.
This is because you may end up owning more shares of a business that’s worth much less over time.
For strong, conservatively-financed companies, accepting scrip is a good option for compounding your wealth.
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Disclaimer: Royston Yang owns shares in Raffles Medical Group Ltd.