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Should you reinvest dividends - and will your broker let you?

TD Direct has stopped processing Scrip dividends for its clients, so what are your other options?
October 20, 2016

An Investors Chronicle reader has recently found out that his broker, TD Direct, will no longer process Scrip dividends, meaning he now has to pay to reinvest his dividends via the broker's dividend reinvestment plan (Drip).

The reader says: "I'd been out of the country, but when checking my emails I read that TD Direct is stopping the processing of Scrip dividends for the top 350 FTSE companies and will be processing them all as Drips with an admin charge plus stamp duty."

So the reader would like to know why this decision was made and what it means for him.

Reinvesting dividends in order to buy more shares in the stocks and investment trusts you own can substantially build up your returns over the long term. Rather than sitting as cash, your dividend is added to your original investment and both generate growth going forward - a process known as compounding. Drips, where dividend cash is used to buy new shares in the open market, are the most common form of automatic dividend reinvestment offered by brokers and platforms. An alternative, but less common, option is a Scrip scheme, which does not incur broker trading fees or stamp duty as shareholders receive dividends in the form of new shares rather than cash.

Few brokers now offer Scrip dividends and TD Direct was one of the few that did. But on 1 October it put a stop to the scheme, having notified customers in August and September. TD Direct says only 1 per cent of its customer base was receiving Scrip dividends when it shut the scheme and stopped offering it "to simplify its operations. The majority of our customers who want to reinvest dividends opt to do so via our dividend reinvestment service".

Barclays Stockbrokers is now the only large UK broker that still offers Scrip schemes to investors. Scrip dividends are the default option in its automatic dividend reinvestment plan where companies offer this. Charles Stanley Direct used to process Scrip dividends but stopped in 2013 when the service was relaunched, and SAGA Share Direct halted the service in July 2015 when it switched its administration services from Barclays to Equiniti.

Not all brokers offer Drip schemes either, including AJ Bell Youinvest, Tilney Bestinvest and Charles Stanley Direct.

A number of brokers do offer automatic reinvestment, albeit at a cost. Regular dividend reinvestment costs £5 per transaction at Alliance Trust Savings, and ranges between 1 and 2 per cent of the dividend amount with some other providers. Several brokers cap the transaction cost, for example Barclays caps its fee at £10 and Halifax Share Dealing has a £12.50 cap. But the cost can still be punitive if your dividends are not large.

However, dividend reinvestment only accrues costs with investment trusts and shares. With open-ended funds you can usually buy an accumulating share class which reinvests your income at no extra cost.

 

Questions to ask before opting for automatic dividend reinvestment

Before you opt for automatic dividend reinvestment check that it makes sense for you. For example, it may not be cost effective to reinvest a small sum, and are you certain you want to buy more shares in the companies and investment trusts you are invested in?

 

Why is it a good idea?

Patrick Murphy, chartered financial planner at Zen Wealth, says: "Reinvesting dividends is a good idea as you will benefit from the effect of compound growth on the reinvested dividends. Compound growth (or interest) with a large initial principal sum can lead to a great amount of wealth over long periods."

And you could benefit from pound cost averaging whereby when prices are low you buy more shares, and when prices are high you buy fewer shares.

 

Do you need the income?

Steve Wilson, director at Alan Steel Asset Management, says: "Whether or not you opt for dividend reinvestment depends on whether you require the income in the first place."

 

But is it cost-effective to do so?

If the cost of reinvesting your dividend is a large chunk of the dividend you received, you might want to think twice. For example, although it might not seem high, a charge of £1.50 for a £10 dividend eats into your payout significantly. In some cases, it might make more sense to build up a lump sum and then invest it.

 

Has the outlook for the company changed?

Make sure you do want to keep building up your exposure to the companies and investment trusts you are invested in. If the outlook for one of them has changed you might not wish to continue investing in it, but to put the money elsewhere. In many cases, dividend reinvesting will apply across your portfolio so think carefully before adding to all your holdings.

 

Scrips/Drips: which platform offer the service

Platform/brokerScrip dividends processedDRIP scheme/charges
AJ Bell YouinvestNoNo but planning to launch one
Alliance Trust SavingsNoYes, £5.
Barclays Stockbrokers YesShares yes funds no, 1% - minimum £1, capped £7.50
Tilney Bestinvest NoNo
Charles Stanley DirectNoNo
Fidelity Personal InvestingNoYes, 0.10%
Halifax Share DealingNoYes, 2%, capped £12.50
Hargreaves Lansdown No

Yes, 1% (£1 minimum, capped at £10). Dividends must be £10 to qualify.

Interactive InvestorNoYes, 1%, capped at £10
iWeb Share DealingNoYes, 2%, capped at £5
Killik & CoNoNo
Share CentreNoYes, 0.5% 
TD Direct Investing (Europe) Not since October 2016Available for FTSE 350 shares. £1.50, dividends must be £10 to qualify 
Trustnet DirectNoYes, 1% capped at £10 
SAGA Share Direct Not since July 2015Yes, £1.50 per trade but not for all securities. If dividend amount is less than price of a single share including £1.50 commission and stamp duty, the cash will remain on your account. 

Source: Investors Chronicle as at 20/10/16