How DRPs Work in IOZ Example Scenario
Dividends Accumulate:
- You have $22 in dividends banked and receive $10 more, bringing the total to $32.
- The share price is $33, so the accumulated dividends are not enough to purchase a new share at this time.
No Purchase Until the Next Dividend Date:
- DRPs typically only purchase shares at the next dividend payment/reinvestment date, not on a rolling basis or based on price fluctuations in between.
- If your accumulated balance remains below the share price on that date, the funds continue to carry forward.
Reinvestment on the Next Dividend Date:
- Assuming you accumulate another $8 in dividends by the next dividend date, your balance would be $40, which is sufficient to purchase a new share.
- The purchase price on that date will be determined by the closing or average price as per the DRP terms.
Key Considerations
- No Mid-Quarter Reinvestments: DRPs do not execute reinvestments dynamically when the share price hits a specific level between dividend dates.
- Partial Shares: Some DRPs allow you to buy fractional shares if your accumulated balance is insufficient for a full share. In your example, if the share price is $33, your $32 might buy 0.97 of a share, depending on the plan.
- Price Risk: You cannot control the price at which the DRP buys shares. If the share price rises by the next dividend date, your accumulated dividends may still not be enough for a full share.
What You Can Do
If you'd like more control over reinvestment timing or pricing:
- Withdraw Dividends: Instead of using the DRP, have dividends deposited into your account. You can then manually reinvest them at your discretion.
- Monitor DRP Terms: Check if the DRP allows for fractional shares, which reduces the need to wait for a full share purchase.
- Supplement with Cash: Some DRPs allow you to add cash to your dividend balance to meet the required amount for purchasing a full share.
By understanding your DRP's terms and limitations, you can better plan your reinvestment strategy.