Dividend Reinvestment Plan vs Bonus Share Plan

Discussion in 'Share Investing Strategies, Theories & Education' started by KayTea, 24th Apr, 2017.

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  1. mcarthur

    mcarthur Well-Known Member

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    Can you explain this one a bit more: why the BSP only for those on high tax?
     
  2. Hodor

    Hodor Well-Known Member

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    DRP acts like you received the dividend and then purchased the shares at the DRP price without paying brokerage, as a dividend is income you pay tax at your rate (or structure holding the shares). LICs have paid tax at the company rate of 30% which you get credit for (franking credits) and pay or receive the difference between your rate and the 30%.

    In BSP/DSSP you receive the same amount of extra shares as you would from a DRP. From a tax perspective things are VERY different both now (income tax) and later (capital gains). With BSP/DSSP you never received any income, so no income tax is paid, this is where the advantage is for those on rates above 30%, they don't pay additional tax come the end of financial year. However if the shares are ever sold the cost base has not changed and will pay tax on the value over the initial purchase price, so one needs to consider if the trade off is worth it.

    *More ramblings below, very optional.
    I like to think of BSP/DSSP as an internal compounder i.e. if the company didn't pay a dividend and all profits were retained the underlying value would increase, as opposed to paying a dividend which decreases the value by the amount of the dividend. Companies do this all the time, growing ones to a greater extent, a company in Australia (like CBA) might pay out 70% of profits as a dividend and retain 30% to grow the business further. BSP/DSSP puts this reinvestment in the hands of the investor directly, albeit through a different mechanism - extra shares. Ideally a business will retain profits if they can invest it wisely and grow the business and will pay a dividend if growth opportunities are limited. I don't like companies that don't pay a dividend even if they are growing, the nature of things (generally speaking) is that if you give a department extra cash they will spend it even if the return is not ideal for the investor, by restricting capital to some extent it hopefully ensures that capital is allocated more wisely. A good management team will ideally balance all these things.

    Berkshire is the classic internal compounder, all profits are reinvested to grow their assets. And if shares are sold you pay capital gains vs the original price (US tax law might be different so this is possibly total wrong). I would happily hold BRK (I don't unfortunately) because they can spread profits between numerous interests depending on what is most attractive vs a company that only has one industry. Plus Charlie and Warren are somewhat more capable at allocating capital than I am ever likely to be and have even mentioned paying a dividend if there comes a time that they view the capital can't be allocated wisely.

    Keep in mind I am an amateur and piece together most of my knowledge from cereal boxes.
     
  3. JK200SX

    JK200SX Well-Known Member

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    in the case of shares invested in a childs name in an informal childrens trust through say Comsec (ie My name AC<Childs name>) would you choose BSP or DRP? This in in reference to some WHF shares that where purchased and there is an option to choose either BSP or DRP. There shares will (hopefully) be kept for the long term, maybe never be sold......

    (I also do recall Peter Thornehill mentioning that he always chooses BSP...)