DRP – the ultimate short-term pain, long-term gain trade-off?

A DRP is a plan offered by a company or ETF manager that allows you to automatically reinvest your cash dividends/distributions in additional shares of the company or units in an ETF. DRPs are typically commission-free – generally there is no brokerage or other transaction costs payable to acquire additional shares or units.

Of course, participating in a DRP means you do not receive a cash distribution; however, DRP can truly be seen as a case of short-term pain for long-term gain, as I will illustrate below.

You may have the option of participating fully in a DRP, where 100% of your distributions are reinvested, or partially, where a portion is reinvested, and the remainder is paid in cash.

“Compound interest is the eighth wonder of the world,” Einstein reportedly said. “He who understands it, earns it. He who doesn’t, pays it.”

In the below chart, you can see the powerful compounding effect that reinvesting dividends can achieve. It shows the returns of the Solactive Australia 200 Index, being the index that Betashares Australia 200 ETF (ASX: A200) seeks to track, over the ten years to 30 June 2022 (net of A200 fees and costs), for:

• an investor who participates fully in a DRP, and
• an investor who takes their dividends in cash.

Source: Bloomberg. Hypothetical example provided for illustrative purposes only. Past performance is not indicative of future performance any index or ETF. Not a recommendation to make any investment or adopt any investment strategy. Inception date of A200 is 7 May 2018. Graph shows the performance of the Solactive Australia 200 Index, adjusted for A200’s management fees and costs. You cannot invest directly in an index.

The investor who participated fully in the DRP would have achieved a return of ~120% over the relevant period on their investment, compared to a ~45% return for the investor who took their dividends in cash.

To put it in dollar terms, a $10,000 investment made at the start of the relevant period would have been worth $22,147 as at 31 May 2023 with DRP, compared to $14,602 with cash dividends. The compounding effect is exponential, the impact of which would be exacerbated over a longer period of time.

The process of reinvesting distributions generates additional returns over time. These returns occur because your investment will generate returns from both the initial principal and the additional units you receive at each subsequent distribution payment date.

Compounding, therefore, differs from linear growth, where only the principal earns distributions each period. Put in simpler terms, the additional units in the ETFs you accrue on each payment date will in turn earn more units in the ETF at the next distribution payment date.

It is important to understand that electing to participate in a DRP or taking a cash distribution will generally not affect your tax outcome. In both instances, the amount of the distribution will generally form part of your taxable income.

If you participate in a DRP, be sure to keep a record of the acquisition price and date of the units you receive. You will need these details to calculate your capital gain or loss, should you ultimately dispose of these units.

All of Betashares ETFs have a DRP available. Please see below to learn how you can switch it on and reap the potential benefits.

You are able to opt into or out of a DRP via Link Market Services once you are a registered unitholder (three days after you purchase the units).

Please see below for the step-by-step process to register your holdings and manage your DRP participation.

Please have the following information before accessing the website:

• HIN/SRN – This can be found through your investment portal or by contacting Link Market Services on 1300 554 474.
• Bank Account Details (BSB)
• Tax File Number or Australian Business Number (TFN/ABN)

• Visit www.linkmarketservices.com.au and click on “Investor Login”
• Go to “Single Holding” and in the Issuer Name field, enter “BETA” or “Betashares”
• Enter your Securityholder Reference Number (SRN) or Holder Identification Number (HIN).  Please note, if not already displayed as such, the HIN should start with an ‘X’ before the numerals.
• Enter your postcode (or, if your registered address is overseas, select Outside Australia)
• Type in the “Security Code” displayed on the screen
• Click on the box to accept the terms and conditions and then click “Login”

Note you may also log in using your “portfolio login”, if you have previously established one with Link Market Services.

Go to Payments & Tax in the menu

• Select “Reinvestment Plan” (or “DRP” if accessing via mobile) to manage your participation in the Distribution Reinvestment Plan.  Joint holders will need to print, complete and return the form available online.