You can think of a dividend as the DIVIDED
profits distributed from a listed company to its shareholders…
You see dividends are normally a good sign of the company’s financial health.
The reasons why directors may decide to pay dividends is to:
• Attract more investors to buy the company’s shares which will then drive up the share price.
• Encourage existing investors to remain invested in the shares.
• Give the impression that a company is growing and is liquid.
Compete with other companies that pay dividends.
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Q. “Hi Timon, I heard that there is an excellent tool for investors for compounding interest called DRIPs… Could you please explain what these are, why people invest in them and if you could provide an example on how they work?”
A. This tool is indeed one of the most genius dividend methods I’ve ever come across for an investor and the company.
To explain it simply…
DRIPs are also known as “Dividend Reinvestment Plans”.
This is an equity investment programme or plan offered by a company to shareholders which allow you to reinvest the dividends you receive into additional shares of the company.
Instead of earning cash as a dividend, you’ll receive more shares from the company instead.
Some of the main reasons why people invest in DRIPs are:
• The dividends you receive are automatically reinvested into new shares.
• Enrolling into DRIPs are quick and easy with only a sign-up form involved.
• They allow you to accumulate your shareholding without paying additional fees
• You can choose how much money you’d like to receive in cash dividends and how many to invest in a DRIP.
I know there are a number of companies in South Africa that offer DRIPs including BHP Billiton, Anglo American, Sasol, British American Tobacco and Ansell to name a few…
But to make things easy, we’ll use a made up company called TIM to understand how DRIPs work in action.
Let’s say you own 100 shares of TIM Ltd, which is valued at R200 per share. The company then declares a dividend payment of R20.00 per share.
You as a DRIP participant holding 100 shares will receive 10 shares of TIM.
Here is the calculation:
Shares received = [(Shares X Dividend per share) ÷ Share price]
= [(100 X R20.00) ÷ R200
= 10 shares
This means with an agreement with a DRIP, at a discounted or free brokerage price, you’ll receive 10 shares to add to your current share holdings of company TIM.
If you’d like to invest in the best shares that pay dividends make sure you read Get rich with Dividends! You can claim a copy here.
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