The best performing stocks with DRPs

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Dividend reinvestment plans (DRPs) are popular among shareholders, because they allow investors to acquire new lots of shares on a regular basis – removing timing risk from the investment decision – at a cheap rate, given that the shares do not incur brokerage, and are sometimes offered at a discount to the market price.

And if you’d signed up for one of the top five DRP we list below, you’d certainly be pleased.

Don’t get complacent

Against that is the hassle of each DRP parcel coming with a new cost base for capital gains tax (CGT) purposes, necessitating thorough portfolio monitoring. If an investor takes part in a DRP, the Australian Taxation Office treats the arrangement as if the investor had received a dividend and then used the cash to buy additional shares. On the income tax front, the dividend is taxable income, whether paid in cash or issued as new shares.

But retail investors cannot get too comfortable with DRPs. For companies, the DRP is a capital management plaything. A DRP is not permanent: it may be adjusted or suspended at any time. In recent years, as interest rates have headed lower, many companies with DRPs have wound back the discount to nil. Many others have suspended their plans altogether. Some DRPs are capped, making it difficult to receive the full amount of the dividend in new stock.

There are no guarantees with any stock that a DRP will remain in place. However, more of the top 50 stocks currently have a DRP than do not. Here is the DRP status of each of the Top 50 stocks at present:


The good thing about DRPs for investors is that in many cases, they are better off taking new shares than the cash dividends – although there will always be situations where people need the cash, and look upon their dividend income as a major part of their total income.

No matter what you did with the cash from the dividends of the top-performing stocks that have DRPs currently, you would have struggled to beat the performance of the shares. On the basis of total return over five years, here are the five best-performed DRP stocks – each of which has handsomely rewarded those investors who consistently recycled their dividends into more shares:

Stocks with active DRPs – best five Top 50 performers

But reinvesting dividends through the DRP does not always put you ahead: here are the worst-performed five stocks of the Top 50 constituents with active DRPs. Clearly, taking the cash in hand offered by QBE Insurance would have been better than reinvesting the dividends. The others are not exactly shooting the lights out over five years, either.

Stocks with active DRPs – worst five Top 50 performers

As we touched on last week, participating in a DRP is actually buying new shares.

If you think the stock is overvalued, you do not have to reinvest the income in new shares – you are perfectly within your rights to elect not to participate in the DRP, and use the dividend cash some other way.

It is worth pointing out again that there is not much point in having a DRP – particularly a nicely discounted one – if the stock does not perform.

In fact, advisers will often recommend that you avoid DRPs, and instead accumulate the dividends in a cash account – and only buy new stock after reviewing its performance fully, referring to your overall investment goals.

The compounding benefit of reinvesting dividends in new shares, in the best-performed companies, is very strong – but the presence of a DRP is not an assurance of healthy capital growth, and in extreme cases, you can even go backwards doing it.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.

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