What's the difference between SCRIP and DRIP? I know they are both ways of getting shares in a company you already have shares in instead of a cash dividend. But why the two? Reams of information - conditions etc - but no easy to understand explanation.
I don't know the answer but Motley Fool would be a good place to ask. They have loads of boards but this one looks most suitable.
Andy C
With a Scrip dividend, new shares are issued by the company, which can be acquired by investors instead of a cash dividend payment.
As part of a DRIP existing shares are purchased in the market which are subject to stamp duty and commission. Any residual cash is retained within the plan.
Owain
SCRIP is where the company issues new shares to existing shareholders instead of a cash dividend.
DRIP is where the dividend is used to buy existing shares on the open market (market cap stays the same, so no dilution of per share value, but stamp duty will have to be paid).
Yes. I got that far by Googling too. What I want to know is the difference in practice.
So in practice what....you get more shares under scrip than drip, the other way round, or the same either way?
That question doesn't really make much sense, actually. But then the concept of a scrip dividend awarded to all shareholders is completely daft, so I'm not surprised that people are confused.
A scrip distribution simply dilutes the share price. Typically, a company notices that its share price is quite high, say £50. So, maybe it distributes 9 additional shares for each existing one. In that case, each shareholder then has 10 shares each worth £5 for each original one worth £50. That sort of makes sense, but some eminent companies don't bother and end up with shares worth thousands per share.
A scrip dividend for all shareholders instead of a cash dividend makes no sense. The company decides not to make a cash dividend, but issues say 5% additional shares instead. So everybody has more shares, but worth proportionately less per share. Maybe, it makes people feel good, but I don't get why?
A DRIP scheme is just a regular investment in the company. It happens to use the cash dividends, but it could equally well just be £50 a month taken from your bank account.
Well, with DRIP there shouldn't be any effect on the share price (or rather, none that's any different from a normal sale/purchase) and you own more of them.
with scrip (assuming it's the same class of shares being issued) it will reduce the value of the existing shares at least in the short term, so your increased number of shares might not be worth any more.
Each shareholder may be given the choice between taking a cash dividend or a scrip dividend, the former will extract cash but reduce the value of the remaining shares, the latter will keep the value of the increased number of shares about the same ...
I think, if you are being offered a choice of one or the other it depends on your tax position and in which jurisdiction you reside. ie as a shareholder one will cost you more tax than the other.
That depends... it all depends on the actual terms of the scrip issue. However in general, its usually in the companies interest to encourage the take up of the scrip issue, so they will often make the deal more attractive than that which you could achieve simply re-investing your cash dividend in more shares yourself.
Typically a company will do a deal where they will issue a 1 for N type of arrangement. e.g. you get 1 new share for every 5 held.
It has the effect in the short term of issuing more shares, (and consequentially devaluing the share price - maintaining the same overall market cap). However it allows the company to retain some of the cash that would otherwise be paid out in dividends. From the investors point of view they can buy more shares (often at a slight discount) and with none of the typical transaction fees.
(Another similar scheme is the "rights issue" where existing investors are given the chance to buy more shares (usually discounted) in proportion to their current holding. That will however also raise additional money, and increase the overall market cap).
Drip, (i.e. electing to receive share in place of dividends) simply uses the dividend to purchase enough *existing* shares at the current market value, to make up the bulk of the dividend. So say your dividend due would have been £18, and the share price is £5, you would get 3 new shares and £3 in cash. Again it can save transaction fees, and gets your dividend income re-invested faster than taking cash and then buying on the open market.
You don't want to get into tax avoidance by choosing which! Avoiding tax makes you evil, apparently.
AIUI a SCRIP dividend increases the number of shares issued thereby devaluing the shares. A DRIP keeps the number of shares constant and buying in the market will increase the value of the remaining shares.
Only if you are not left wing.
So are outside your control? If everyone opts for SCRIP, the value of your shares will be devalued too. So why the choice?
All I was really hoping for was some guidance on the circumstances where one is better than the other.
Yes - but in practice for indivduals in the UK and quoted UK companies there is rarely any tax difference between taking cash or "scrip" dividends. The individual's income for tax purposes is the cash equivalent of the shares. The cash equivalent is usually just the cash dividend they could have received. The only exceptions are where there was no cash alternative offered or the cash was well below the market value of the shares. Then it's the market value.
But can you then explain the difference in tax terms between SCRIP and DRIP? Let's say for the sake of argument at the standard tax rate.
Yes. See above. In other words, usually none.
That follows because the DRIP is irrelevant for UK tax purposes: tax is concerned only with the cash dividend. It doesn't care if the cash is then used to buy shares in a DRIP.
PS
A couple of caveats in case you take the above as personal financial advice and sue me ;)
a. please note I am talking about "ordinary" scrip dividends and UK companies. Other "scrip dividends" can differ - eg from foreign companies;
b. taxation of dividends changes from 2016-17 with no tax on the first £5,000 of dividends and then rates of:
Basic rate (and non-taxpayers) 7.5% Higher rate 32.5% Additional rate 38.1%
You don't usually get the choice, since a scrip issue is not an everyday offering. A company will only typically make a scrip offer if they have a particular need to retain more cash (for projects, investments, whatever), or perhaps if they want to lower their share price. Generally speaking its usually worth taking the scrip offer when available, otherwise you will see the value of you holding lowered (at least temporarily). However if you portfolio is too heavily biased to the company in question, then the cash alternative for reinvestment elsewhere makes some sense (or for that matter if you need the cash yourself).
Drip is (IIUC) always available - and does not require any extraordinary action from the company. Its a good way to build your total holding in a company, and keeps you invested for the longest time possible. (However see notes previous about too much exposure to a single holding)
Depends on what you are trying to achieve; if you have an established portfolio, and want it to generate income then either take the cash in the first place, or setup drip for that holding and sell shares as you require (the latter only really worth it in a rising market, since although you will avoid some charges on purchase, you will incur them on selling).
With a scrip issue, there may be strings on how long you need to hold the shares, but usually they are worth taking unless you think its a company that's on the ropes and you were planning to get out anyway.
(Note there are possibly CGT issues that I have not thought through - especially in light of recent changes to taxation of dividend income)
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