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Why I Hate DRiPs

March 17th, 2007 at 09:13 pm

When I started out investing in stocks I could only afford to purchase relatively small amounts ($2000 at a time) - and it took me several months to save up enough to make another purchase. I'd have bought a more diversified portfolio of stocks and in smaller amounts, but in those days there were no online brokers and "full service" brokerage often had a minimum fee of $50, which made trades of less than $2000 uneconomic. One way to avoid the cost of brokerage while adding to my stock holdings was to participate in the Dividend Reinvestment Plan (DRP) available from many companies. Aside from the benefit of not having to pay any brokerage, in those days many of the DRPs issued new shares at a discount to the prevailing market stock price of 2%-5%. These days the discount has been reduced or eliminated completely, which makes these DRPs less attractive. [BTW - it pays to read the "fine print" of all available DRPs if you are a small shareholder. Most plans issue whole numbers of shares at the applicable price, and rollover any surplus dividend amount in a DRP account until the next dividend date. However, a few plans "round up" the number of shares being issued to the next whole number. This can boost dividend rates significantly if you have a small share holding and end up being issued, say, 5 shares instead of 4.53)

However, these days I tend to get all dividend paid out as cash, and simply use the dividends to help pay the interest on my stock margin loans. Looking back at the DRP share purchases from my early days as a stock investor I'm amazed at the tiny dividend amounts and corresponding stock purchases that I was accumulating. Now I'm left with a major headache going back through all the trading records and DRP statements to work out the "cost base" for my current stock holdings if they include DRP stock purchases. If I didn't spend the time doing these calculations myself and instead paid an accountant to do my tax returns the extra cost would definitely outweigh the price discount and brokerage benefits of using a DRP. For example,
Woolworths
Cumulative Totals
Date Tran QTY PRICE FEE TOTAL Cost QTY
15/06/1993 BUY 1,200 $2.45 $- $2,940.00 $2,940.00 1200
20/07/1993 SELL -400 $2.45 $- -$980.00 $1,960.00 800
30/11/1993 DRP 16 $2.95 $- $47.22 $2,007.22 816
29/04/1994 DRP 17 $2.89 $0.01 $49.06 $2,056.28 833
30/11/1994 DRP 19 $2.61 $- $49.49 $2,105.77 852
28/04/1995 DRP 19 $2.72 $- $51.72 $2,157.49 871
17/11/1995 DRP 24 $2.90 $0.01 $69.50 $2,226.99 895
26/04/1996 DRP 22 $2.87 $- $63.03 $2,290.02 917
12/11/1996 SELL -900 $2.91 $64.05 -$2,554.95 -$264.93 17
12/11/1996 DRP 28 $2.58 $0.01 $72.33 -$192.60 45
24/04/1997 DRP 1 $3.22 $- $3.22 -$189.38 46
15/10/1997 DRP 1 $3.94 $- $3.94 -$185.44 47


Just how hard it can get keeping track of all the DRP transactions is shown by the Sale on 12 Nov 1996. I'd gathered together all the share certificates and taken them to my broker to sell my entire holding. Unfortunately I didn't realise that I'd mislaid one DRP stock certificate, and ended up with a small residual stock holding which was worth less than the brokerage would have cost to sell them! These days with electronic stock records (CHESS) having replaced certificated holdings in Australia, this is less of an issue.

It's also slightly easier to calculate the CGT cost basis for stock holdings under the current rule of taking the (sale proceeds - issue cost) as the capital gain, and applying a 50% discount when calculating the Capital Gains tax using your marginal income tax rate for stocks held more than 12 months before sale. Under the previous CGT regime you have to work out an adjusted cost basis for each stock lot individually based on the CPI index at the time of purchase and the CPI index at the time of sale!

A final draw-back of using DRPs is that each DRP stock purchase has to be taken into account as an additional investment if you ever want to work out your overall portfolio rate of return. This is one of the reasons I've never done to sort of detailed analysis of my investment performance the Moomin Valley has been posting about. At best I've made rough estimates of my annual portfolio ROI based on starting and final valuations and an approximation of how much additional money I've contributed during the year in terms of stock purchase, retirement account contributions and interest payments on my stock and real estate investment loans. I'm sure if I ever tried to calculate the try ROI over the past 10 or 20 years I'd stuff it up and miscalculate like the Beardstown Ladies Investment Club!

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