Guide To Understanding Pros And Cons Of Choosing Scrip Dividends

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 inside a strong financial position to deal with challenges in the future, or to seize growth opportunities that emerge. Some have even taken a further step of giving investors the choice to receive scrips as dividends rather than taking a cash payout, that allows companies to preserve even more of their capital.

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

Pro #1: Enables you to Acquire More Shares In A Company At A Discounted Rate

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

By choosing scrip dividends, existing investors could 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 read more units of shares, they'd be in a position to enjoy greater capital appreciation if the company's share price moves up, that will theoretically be much greater than the need for the cash dividend.

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

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. Simultaneously, those who rather take the cash payout (in order 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 therefore are offering investors the option to defend myself against additional shares at a discounted rate might indicate a weakened cash position.

Investors have 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 may also throw your ideal asset allocation or portfolio mix from whack, requiring more work and transactions to rebalance.

Con #2: Scrip Dividends Aren't Suitable If You Depend On Dividend Payouts For Cashflow

It is obvious that if you're counting on your portfolio's dividend payouts for cashflow purposes, then scrip dividends would not 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 or not 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 is going to be offered depends proportionally on the size of your holdings, retail investors having a small number of shares may find that the scrip they receive would be in odd lots, that makes it more troublesome and more expensive to sell in future.

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

How To Opt To Receive Dividends As Scrips

In yesteryear, investors holding their stocks in their own individual CDP account would receive a letter and will have to indicate their choice before sending it back. Because of efforts by SGX to digitise their processes, CDP users can now submit their instructions online with 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, texts, or in-app notification.

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