Meet DRP：Invest with Ease
We’re pleased to announce that moomoo has launched Dividend Reinvestment Plan for US stocks eligible for fractional shares trading. Starting today, you can use Dividend Reinvestment Plan to automatically reinvest your dividend income into the US stocks you hold. This means you can effortlessly build your investments with each dividend payment, all while enjoying a seamless and automated experience.
Here’s everything you need to know about getting started with DRIPs on our platform.
What is a dividend reinvestment plan (DRP) for US stocks?
A dividend reinvestment plan (DRP) is a fully automated reinvestment service offered by Moomoo Securities Australia Ltd that allows you to automatically reinvest your cash dividends into additional shares of the same stock, purchasing shares instead of receiving the dividends in cash. This approach helps you enhance the potential for compounding growth, and can help make more effective use of your cash dividends.
*Note: If the cash dividends are insufficient to purchase a whole share, a fractional shares order will be placed instead.
In a dividend reinvestment plan, when a company declares a dividend, shareholders who participate in the program receive additional shares proportional to the dividends they would have received in cash.The number of additional shares is determined based on the dividend amount and the current market price of the company's stock.
How does a DRP work?
DRP investing, or a dividend reinvestment plan, allows shareholders to automatically reinvest their dividends into additional shares of a company's stock. Investors that are actively engaged with DRP investing are looking for securities that will allow them to enrol into a dividend reinvestment scheme, accumulating additional shares over time.
DRP for US stock
By enrolling in the plan,your cash dividends from a specific stock will be automatically reinvested in additional shares of the same stock. This reinvestment can occur at regular intervals, such as quarterly or annually, depending on the company's dividend schedule.
DRP for ASX
Due to the nature of CHESS-sponsored accounts, you'll need to check which share registry your holdings are with and manage your participation details through their online portal. Please note that not all ASX-listed companies offer a dividend reinvestment plan.
Example of a US stock dividend reinvestment plan
A hypothetical example of a dividend reinvestment plan (DRP) would be as follows:
Sarah is a shareholder in ABC Corporation. The company announces a dividend payment of $1.00 per share. Sarah holds 500 shares in the company. She has the choice to either receive a cash dividend of $500 or participate in the Dividend Reinvestment Plan (DRP).
Sarah decides to enroll in the DRP and chooses to reinvest her dividends in ABC Corporation. The company’s DRP allows dividends to be reinvested at the current market price of $25 per share. As a result, on the dividend payment date, Sarah’s $500 dividend is used to purchase 20 additional shares of ABC Corporation’s stock ($500 ÷ $25 = 20 shares).
After the dividend is paid, Sarah's total shareholding increases to 520 shares (500 + 20=520 shares). The reinvested dividend is treated as if Sarah received the cash dividend and used it to buy the additional shares.
*The examples above illustrate US stock DRPs
What are the benefits of a dividend investment plan?
Dividend Reinvestment Plan (DRP) provide several key benefits to investors, which make DRPs an attractive option for those looking to optimise their investment strategy and build wealth systematically.
Compounding returns: DRPs facilitate the compounding of returns by reinvesting dividends into additional shares. These newly purchased shares generate their own dividends, which are then reinvested. This compounding effect can potentially accelerate the growth of the overall investment value over time.
Dollar-cost averaging: DRPs implement a disciplined investment strategy by automatically reinvesting dividends at regular intervals, irrespective of the stock's market price. This approach helps investors purchase more shares when prices are low and fewer shares when prices are high, potentially mitigating the impact of market fluctuations. Dollar-cost averaging smooths out the average cost per share over time.
Increased share ownership: By enrolling in a DRP, investors can gradually accumulate more shares of a company's stock over time. This increased ownership can enhance their participation in the company’s growth and potentially lead to higher future dividend payments. The reinvestment of dividends allows investors to increase their stake without needing to invest additional capital.
Long-term wealth creation: DRP is particularly advantageous for investors with long-term financial goals. By consistently reinvesting dividends and taking advantage of compounding returns, investors can steadily grow their investments over time.
It is important to note that while DRP offers these benefits, they may not be suitable for every investor. Each DRP has specific terms, including fees, restrictions, and tax considerations, which should be reviewed carefully.
What are the drawbacks of a dividend investment plan?
Although dividend reinvestment plan (DRP) provide several advantages, it's important to consider the potential drawbacks and factors involved：
Lack of flexibility: Participating in a DRP means dividends are reinvested automatically, limiting control over cash use. If an investor prefers cash for immediate needs or other investments, a DRP may lack flexibility
Administrative burden: DRP requires investors to keep track of the cost basis of each reinvested share, as it determines the capital gains or losses when those shares are sold. This can create additional administrative complexity and record-keeping responsibilities for investors, especially if they hold shares in multiple companies with DRP.
Lack of diversification: Participating in a DRP means reinvesting dividends into the same company's stock, your investment becomes concentrated, which can increase risk if the company's performance deteriorates or it faces negative events.
Potential for overvaluation: DRP automatically reinvest dividends into the company's stock, regardless of its current valuation. If the stock is overvalued, reinvesting at inflated prices may be disadvantageous, making it important to assess the company's fundamentals and market conditions regularly.
It's crucial for investors to thoroughly research and understand the terms, fees, and potential drawbacks of specific DRPs before enrolling.
🎓 Learn more:How to pick stocks like masters
How do I reinvest dividends in Australia?
Company-operated dividend reinvestment plan (DRP):
Many companies in Australia offer their own Dividend Reinvestment Plans (DRP). To participate, you generally need to complete an application form provided by the company, indicating your intention to reinvest your dividends. Once enrolled, the company will then automatically reinvest the dividends by issuing additional shares in your name.
Broker-operated dividend reinvestment plans
Some brokerage firms in Australia offer Dividend Reinvestment Plans (DRP) on behalf of their clients. If your brokerage offers this service, you can usually opt into the DRP through your brokerage account. The brokerage will handle the reinvestment process and allocate additional shares to your account.
Managed funds
Some managed funds or exchange-traded funds (ETFs) that have dividend reinvestment features also provide the DRP service. These funds automatically reinvest the dividends they receive from their underlying investments into additional units of the fund, effectively compounding your investment.
Share registry-operated plans
Some share registries in Australia, such as Link Market Services or Computershare, offer dividend reinvestment facilities. You can contact the share registry that manages your shares to inquire about their dividend reinvestment options and the process for enrolling in their plan.
Final words on Dividend Reinvestment Plans
Dividend Reinvestment Plan (DRP) offer significant advantages for investors, particularly those with long-term goals. By automatically reinvesting dividends into additional shares, DRP provides a change to compound the potential growth over time.
With moomoo, you can take advantage of a seamless investment experience, making it easier to enroll in DRP and manage your investments effectively. It's important to note that the availability and terms of dividend reinvestment options can vary between companies and brokers. Before deciding to reinvest dividends, carefully review the specific terms and conditions of the plan, including any fees or other transaction costs associated with participation.
Learn more：Dividend Reinvestment Plan FAQs
