Monday, December 09, 2013

REITs scrip dividend scheme - Beware of its pitfalls

Dear readers,

I have shared previously at this blog on the scrip dividend scheme or dividend reinvestment plan (i.e. DRP). Readers who missed it previously can review it again at the link below:

Recently, during my conversation with one investor, I have discovered that he had elected to participate in the DRP for a REIT but did not choose the part cash, part share option. He choose Option 1 to let the company decide the number of units that he could be given, based on their computation. Incidentically, this REIT take the whole unit and ignore the decimal places to compute the number of units he is entitled to for each dividend payout. And for REITs, it is even worse because they tend to spilt one dividend into many components when computing the numbers. For example, below is the dividend payout for REIT M on 29 Nov 2013.

2. 1JUL-30SEP,DRP SGD 0.00025
3. 1JUL-30SEP,DRP SGD 0.00265

The issue price of the DRP is priced at S$1.0545 per unit. Assuming a unit holder holding 1000 units of REIT M, he will be issued:

1. (1000 x 0.0048)/1.0545 = 4.55
2. (1000 x 0.00025)/1.0545 = 0.237
3. (1000 x 0.00265)/1.0545 = 2.513
4. (1000 x 0.0105)/1.0545 = 9.957

Since, each component will be rounded down to the nearest whole unit, we have 4+0+2+9=15 units. Which means, this investor took home 15x$1.0545=$15.82 worth of units. If he had elected for cash dividend, he would have taken $4.80+$0.25+$2.65+$10.50=$18.20. Put it simply, he had lost 13% of his dividends in one quarter by simply opting for Option 1!

Remember, this is only one quarter worth of dividends. Since there are four distributions in one year, I leave readers out there to do your own computation on the amount of dividends he would have lost for letting the company decide on the computation. For this REIT, they have retained the residue amount of dividend so you won't get your remaining cash back as dividend if you opt for Option 1.

You might ask, if one still wants to take the scrip dividend and not cash, what should you do to minimize rounding errors? The answer is to take part cash, part scrip option. This will "force" the REIT to give back some of the remaining part of each component that is not converted into units to cash and return to unitholders.



Blogger AhJohn said...

Good post!
GH, I choose DRP for SPAusnet, and get the dismal in cash, so it's depends on company?
Have to read carefully next time.

12:31 AM  
Blogger ghchua said...

Hi AhJohn,

Yes, it depends on companies and you have to read the terms and conditions of the DRP carefully. For SP AusNet, JSH, JMH etc, I have no issue at all as they return the residue amount back to you in cash. In fact, each component of the dividend for SP AusNet DRP scheme had been computed to the nearest share and the remaining they returned you in cash.

This post is with reference to REITs and in particular REIT M. No prizes for guessing which REIT I am referring to. :)

5:34 AM  

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A self-directed investor, looking to invest for retirement needs and bypass all those expensive financial planners/insurance agents. Investing is fun, profitable or most important of all, knowledge gained is useful for the rest of your life!

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