The benefits of a Dividend/Distribution Reinvestment Plan (DRP) cannot be overstated. For investors, particularly those with a long-term investment horizon, it could mean the difference between working until you’re 70 or retiring earlier in a strong financial position.
A DRP is a great tool to help investors achieve a range of investment outcomes, including:
- earning compounding returns
- accumulating ETF units, typically for no commission, and
- smoothing out cost price.
What is a DRP?
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.
The difference of DRP - DRP in action
“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 assumes an investment in a portfolio made up of the S&P/ASX 200 Index constituents (bearing in mind that you cannot invest directly in an index), and shows the returns over the ten years to 30 June 2021, 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. You cannot invest directly in an index. Not a recommendation to make any investment or adopt any investment strategy.
The investor who participated fully in the DRP would have achieved a return of ~243% over the relevant period on their investment, compared to a ~159% 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 $24,337 as at 30 June 2021 with DRP, compared to $15,928 with cash dividends, which is attributed to $2,900 cash dividends and $3,028 capital appreciation, in addition to the $10k initial capital outlay. The compounding effect is exponential, the impact of which would be exacerbated over a longer period of time.
Achieving compounding returns
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.
Accumulating commission-free ETF units
Another benefit of participating in a DRP is the periodic accumulation of ETF units without transaction costs. Not only is DRP an automated process, removing the need to manually buy units through a broker, it is also generally commission-free. If you opt to participate fully in a DRP, every cent of your distribution is automatically reinvested in more units.
Smoothing out cost price
Given the distribution is reinvested into new units at the prevailing market price of the ETF (or to be more accurate, the closing price of the ETF units the day before the ex-distribution date, less the distribution amount), a DRP can be an effective means of smoothing out your overall cost price.
For a given distribution amount, if the ETF unit price has fallen, you will be entitled to more units; if the price has risen, you will be entitled to fewer.
A DRP can therefore be a great way to average down (reduce average cost price) when unit prices have fallen. When the ETF unit price has increased, you will be entitled to fewer units, but the value of your holding will have increased. It removes the challenge of timing markets given the regular, periodic nature of distributions.
Things to remember
Participating in a DRP may not be suitable for all investors. For example, an investor looking for regular income may prefer to have their distributions paid in cash. Also, investors do not have the ability to control when and at what price their additional ETF units are acquired under a DRP. You also need to take into account the administration and tax considerations, some of which are discussed below.
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.
Managing your DRP participation
The majority of the 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). Whether a DRP is available for a BetaShares fund is stated under the Profile section of the relevant Product Page.
Please see below for the step-by-step process to register your holdings and manage your DRP participation.
1. How to access the Investor Centre online
|Please have the following information before accessing the website:|
|1. HIN/SRN – This can be found through your investment portal or by contacting Link Market Services on 1300 554 474.|
|2. Bank Account Details (BSB)|
|3. Tax File Number or Australian Business Number (TFN/ABN)|
2. How to log in
- 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.
3. How to participate in the DRP
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.
To learn more about ETFs and how they could to help you achieve your investment goals, visit our BetaShares Education Centre.