If you invest directly in shares you may have the option to take your dividend payments in company shares rather than as a cash payment – this is called a Dividend Reinvestment Plan or DRP.

Why it’s a good idea

•  The shares in a DRP are usually offered at a discount to the market price, meaning you get more for your money
•  There is no brokerage to pay to purchase the shares
•  It provides you with the discipline not to spend your dividend payments unwisely – a form of “forced saving”
•  You regularly purchase additional shares regardless of their price at the time, meaning the cost averages out in the long run
•  Because your overall number of shares increases, so does your wealth over the long term

Traps

•  You still pay tax on the dividends the same way you would if you received the payment as cash.  Its important to allow for this come tax time
•  Calculating capital gains on your shares will be more complicated when they are sold as they will have different gains depending upon the time and price they were purchased at

Generally participating in a DRP is a good long term strategy but you should always talk to your financial adviser to get advice.