There has been a wave of new investors coming into the share market chasing better returns on investment. Reinvesting shares in your portfolio is one strategy that can help guide you on your path to financial independence. Investing short or long-term you must review options that will allow you to make the best investing decision. Everyone has a different strategy as their circumstances and goals differ from one another. Therefore, creating an investment plan can help set you on a path to success. This article will examine the difference between investors and speculators and DRP vs DSSP.
Investor vs Speculator
Investors calculate the value of a share based upon the value of the business. This is, in contrast, to simply speculate on whether the market price of the stock will increase or decrease. Both types of investors can use the shares that they acquire to build wealth over time. In this article, we will explore the difference between Dividend Reinvesting and a Dividend Substitution Plan. Therefore, you can make an informed decision on what type of investor you would like to become.
DRP vs DSSP Investing Strategies
Dividend Reinvestment Plan
A Dividend Reinvestment Plan (DRP) enables you to reinvest the cash dividends paid out of the company profits. Investors can choose to have additional shares or a fraction of a share purchased without paying brokerage. This is beneficial twofold. Firstly, investors get exposure to a cheaper way of purchasing shares. Secondly, they reduce the volatility and risk over time through dollar-cost averaging. On the one hand, a drawback is that you cannot time the market. Furthermore you must wait until the dividend date to reinvest the shares. However, this can be an effective method to grow a passive income and accumulate wealth over time.
DRP vs DSSP Allocation of Shares
The shares are generally allocated at the average market price for the period specified. This is the daily average price for the shares traded on the ASX or CHi-X exchanges. In some instances, the shares that are allotted could have a discount percentage allocated to them. This is not always the case when accessing a dividend reinvestment plan. Therefore, it is important that you read the information guide that is attached the to reinvestment plan.
The amount of the dividend paid is owed at the record date of the shares. You have the option to no longer partake in a DRP. This means that you have the option to switch the allocation from full to partial participation. Moreover, you have the option to select the number of shares you would like to participate in the program. Alternatively, you can choose not to take part in the DRP at all. This means that your shares will be paid in cash rather than being reinvested.
There are some investors that are not eligible to participate in the program. For instance residents in the United States. In addition, people connected with another jurisdiction outside of Australia that is deemed unlawful. Having multiple holdings of shares will mean you would be required to submit a participation form for each DRP. For more information on an example of a dividend reinvestment plan, have a read of the Commbank DRP rules.
Dividends Paid Franking Credits
By reinvesting the dividends you can also take advantage of the franking credit available on some of the dividends. Franking credits provide a tax offset to Australian investors for the company tax that the company has already. paid. This avoids a situation where the investor is double taxed on the share profits that they earn. Australian Shareholders have an opportunity to get a better tax refund at the end of the year. The tax payable can also be reduced for those with higher incomes.
Dividend Substitution Plan
Dividend Substitution Share Plan (DSSP) is similar to DRP however you do not incur income tax payable upon receipt of the shares. Instead, the tax owed on the shares is deferred until the point at which you sell them. This can be beneficial in delaying the tax payable to a later point in time. Moreover, increasing your cash flow can allow you to invest in another opportunity to increase your net wealth. The shares holders must be Australian residents to take advantage of this strategy. The strategy will benefit those investors that are on high marginal tax rates.
DRP vs DSSP Summary
Investing in the share market can be an overwhelming process when starting out blurring the lines between investing and speculating. There is a raft of new information that you need to review and understand such as DRP vs DSSP. Once you have invested for a period of time the process becomes easier. There are ways you can learn more about investing to ensure that you are ahead. of the market and up to date on the latest changes. If you are wanting to get started investing in the share market, compare these online broker features and fees. For further information about investing your can read the article on investing in the share market.
