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Guide To Understanding Pros And Cons Of Opting For Scrip Dividends

We help you decide if you want second helpings of your stock investment

In view of the lukewarm economy and uncertain timeline for recovery, even listed companies with healthy cash flow and operating profits have announced more conservative dividend policies.

Doing so will allow them to conserve cash for the months ahead and keep themselves in a strong financial position to deal with challenges to come, or to seize growth opportunities that emerge. Some have even taken a further step of giving investors the option to receive scrips as dividends instead of taking a cash payout, which allows companies to preserve even more of their capital.

Let’s understand the pros and cons of taking up scrip dividends if offered.

Read Also: Here’s How You Can Start Building A Dividend Income Portfolio To Replace Your Wage In Singapore

Pro #1: Allows You To Acquire More Shares In A Company At A Discounted Rate

When a company announces a scrip dividend scheme, the price for scrips would be set, and this is usually at a discount off the recent trading price.

By opting for scrip dividends, existing investors would be able to acquire more units of shares at a discounted price, without incurring any brokerage fees.

Pro #2: Potentially Greater Capital Appreciation/Dividend Payouts Upon Recovery

When investors acquire more units of shares, they would be in a position to enjoy greater capital appreciation if the company’s share price moves up, which will theoretically be much greater than the value of the cash dividend.

Opting for scrip dividends essentially has the effect of reinvesting your cash dividends, which can have favourable compounding effects. Furthermore, having more shares would also entitle you to a greater share of dividends in future.

Read Also: Income Investing: How To Select The Right Stocks To Build A Sustainable Dividend Income Stream

Pro #3: It Is Optional, Giving Investors Flexibility And Choice

The best thing about scrip dividend schemes is that it is completely optional. Investors who believe in the company, and want more of its shares, can do so at favourable terms. At the same time, those who rather take the cash payout (to save, spend or invest elsewhere) are free to do so as well.

Con #1: You Might Be Acquire Even More Shares Of A Weak Company

The fact that the company needs to conserve cash and are offering investors the option to take on additional shares at a discounted rate might point to a weakened cash position.

Investors need to evaluate whether they would still be best served to concentrate even more money in the existing company or redeploy their cash elsewhere.

Having more shares might also throw your ideal asset allocation or portfolio mix out of whack, requiring more work and transactions to rebalance.

Read Also: Asset Allocation And Portfolio Rebalancing: How Often Should You Review Your Investment Portfolio?

Con #2: Scrip Dividends Are Not Suitable If You Depend On Dividend Payouts For Cashflow

It goes without saying that if you’re counting on your portfolio’s dividend payouts for cashflow purposes, then scrip dividends wouldn’t be very useful in the near-term.

With reduced dividend payouts expected across the board, you might want to project the cash payouts you’re expecting to receive before deciding whether to take up scrip dividends or not.

Con #3: For Those With Small Holdings, Scrips May Be In Odd Lots

Since the amount of scrip investors will be offered depends proportionally on the size of your holdings, retail investors with a small number of shares may find that the scrip they receive would be in odd lots, which makes it more troublesome and more expensive to sell in future.

This is an even more important consideration for investors who do not plan to hold on to the shares for a long time.

How To Opt To Receive Dividends As Scrips

In the past, investors holding their stocks in their own CDP account would receive a letter and would need to indicate their choice before sending it back. Thanks to efforts by SGX to digitise their processes, CDP users can now submit their instructions online through the SGX Investor Portal.

For investors using custodian accounts, the communication method would vary depending on the brokerage you use. Common methods include e-mail, WhatsApp, text messages, or in-app notification.

If you take no action, you would be making the default, unspoken choice to receive dividend payments in cash.

Read Also: How The SGX Investor Portal Can Be A One-Stop Destination To Support Your Investment Journey

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