DRPs are usually taken up by the "buy 'em and hold 'em" investors who do not need a dividend income stream.
The advantages of a DRP are:
1. your holding is built up without any actions on your part
2. shares are allocated with no brokerage charges
3. can be used to average out (up OR down) your costs
4. allocations are often at a discount to market, so good value - ON THE DAY
5. Franking credits are still claimable at tax time
6. Getting a small divvy is usually meaningless. Seeing your holding grow may be more satisfying
The disadvantages are:
1. you have no control at what price you buy
2. following on from above, you inherently agree to buy the shares no matter what cycle the market is in
3. you get no income but possibly have a tax liability
4. many companies now give you an integer number of shares and keep the dividend remainder to apply to the next DRP. If you sell your holding you don't get that residual back. Minor for low cost shares, more significant for high cost shares.
5. Your accountant will love you because of the extra work involved in doing your tax return
6. More difficult, but not impossible, to sell selective parcels of shares to maximise your income/tax advantage
7. Divvies can be applied to more prospective companies - you lock yourself into a past investment and build a "loyalty syndrome" which is trading death
8. The Directors control whether a DRP is offered for that dividend and at what discount, if any - so a few unknowns out of your control
As usual, it horses for courses and there is no single rule you should go by, except DO YOUR OWN RESEARCH. One tip I can offer: determine when the company sets the DRP price. If in the lead up to the ex date, you will be paying too much for the share, if after the ex-date, when the SP is discounted by the divvy, you will more likely get a good deal.
The ANZ used to put out a booklet listing all DRPs and the rules (discounts, price setting window, etc). Does anybody know if such a resources exists?
