I hold shares in NAB, ANZ and WESTPAC. They will pay dividends in a couple of months. Is it wise to reinvest the dividends in these banks for shares at the present market price?
What do you say about reinvesting in the same companies with their dividends?
A: This is a really good question because there is no right or wrong answer to participation in DRPs (dividend re-investment plans). Many years ago, companies offered big discounts on shares purchased through a DRP (sometimes as high as 7.5%), and it was arguably a “no-brainer” to participate. Today, most of the discounts have gone- so it is not a straightforward decision.
I think a DRP makes sense if:
- You don’t need the cash – and you would end up with small balances that would otherwise just go into the bank account;
- The market is in a long term up-trend; and
- In regards to the individual company, you think it looks sold for the long term.
Currently, I think banks are still somewhat “cheap” compared to the rest of the market. If I didn’t need the cash, I might go into the DRP but I would certainly keep my participation under ongoing close review.