frugal

Should you take the scrip dividend? (DBS)

Scrip Dividend Scheme letter from DBS
This is how the letter looks like

On Monday, I received a letter from DBS. (This is how it looks like.) It was to inform me of DBS’ latest scrip dividend scheme. Ever since DBS announced this, I got pretty excited. As a new investor, most of my “gains” were from capital gain (the price difference between the stocks you sold and bought) or dividends. Although I am pivoting my strategy towards a lower exposure to dividends, I was still curious what this scrip dividend scheme will provide for me.

Naturally, I googled online. The first result was from the DBS website itself. So the Scrip Dividend Scheme (SDS) “provides shareholders with the option of receiving their dividends in the form of shares instead of cash.” In other words, DBS is allowing me to earn more of their shares. The first thought to myself was “wow, that means I can earn more dividends in the future because holding DBS is something I intend to do anyways”.

However, I was like “hold up, it seems too good to be true…” I googled again, this time for past experiences of scrip dividend schemes. I realised that this has happened in the past and some people were complaining about the odd lots they were holding. “How am I supposed to get rid of the odd-lot”

Note: In SGX, you can only trade 100 lots at a time because they are the pre-determined “board lots”.

I realised that was a huge problem

Okay, so can we sell odd lots? Yes, we can.

But is it more expensive? Yes.

I personally use DBS Vickers, so I went to their website to check. They mentioned that “commission for trading in the odd lot/unit share market will be based on the prevailing phone rate charges. For more details, please click here for pricing schedule.”

This is the commission structure I took from their website.

Odd lotsNormal (Board lots)
Minimum CommissionSGD40SGD25
SGD50,000 and below0.375%0.28%
Above SGD50,000 – SGD100,0000.300%0.22%
Above SGD100,0000.225%0.18%

As seen, it is quite a bit more expensive.

Personal take on the DBS’ Scrip Dividend Scheme

As I only have a small capital invested into DBS, I will personally opt for dividends. The odd lots will cause me trouble in the future when I plan to sell DBS. Although not any time soon, I cannot predict the future and it is still better for me to have the option to sell off the share at a cheaper cost.

Let’s layout 2 scenarios

Let’s say there are 2 investors. One has only a small capital invested in DBS and the other has a larger capital. Assume that they bought their shares at $20.

In each scenario, we will see whether it will be better for the investor to take the dividend or take the extra shares. Also, to give it a proper conclusion, both investors will sell off their shares after 5 years.

We will assume there is a conservative 3% capital growth and a dividend yield of 4%.

I have done a mini simulation in this excel sheet. If you are interested, you can check it out. Make a copy for yourself and play around with the values.

Note: This sheet is only for educational purposes and may not be 100% accurate. General assumptions have to be made in order to make the calculation possible. I cannot predict the future capital growth of the stock nor the dividend yield.

Scenario A: Small capital invested in DBS ($10,000)

The dividend payment this time is $0.18 per share. If you hold 500 shares, you will receive $90 in dividends. On the other hand, you can opt to receive shares. In this case, you will earn 4 more shares. It is priced at $21.04 per share.

Taking dividendsTaking shares
Net profit$3,991.29$3,894.60

From my calculations for Scenario A, we can see that taking dividends will still make you slightly better off. I attribute this largely because as a small investor, you will not earn many shares from this scheme, and it will not contribute much to capital growth and future dividends. Moreover, the shares you bought are assumed to be cheaper than the ones declared in the scheme.

Note: This is heavily based on many assumptions. If any part of the assumptions is changed, this calculation WILL change. Therefore, if you think my parameters are invalid, this calculation may be inaccurate for you.

Scenario B: Large capital invested in DBS ($500,000)

If you hold 25000 shares, you will receive $4500 in dividends. On the other hand, you can earn 214 more shares.

Taking dividendsTaking shares
Net profit$199,600.73$194,823.67

From my calculations for Scenario B, taking dividends still net more profit. I attribute this mainly to the initial cost you bought the shares for. Because I assumed it to be $20.00, you are not getting a discount for taking the shares.

So, if you have a large capital invested in DBS AND your cost is higher than $21.04, do consider taking the scrip dividend scheme.

Note: This is heavily based on many assumptions. If any part of the assumptions is changed, this calculation WILL change. Therefore, if you think my parameters are invalid, this calculation may be inaccurate for you.

4 Comments

  • Celdric

    If you’re trading, yes, odd lots will be a problem.

    If you’re investing for the long-term, odd lots are not a problem at all, especially since you’re getting it undervalued during this COVID recession period.

    • Junior

      I agree about the trading part. But for the investing part, it would depend on your entry point. If you entered into DBS at a lower price than $21.04, it may not be “undervalued”, and you may be unnecessarily increasing your cost. Although many people have quite bullish cases for DBS, which are justifiable considering they are “Asia’s safest bank”, I do have my doubts about DBS in the very long-term. (like 10 years or more)

  • Novice

    Thank you sir for an insightful analysis and comparison. I m a small capital share holder as in A. From my view, it is better to take dividend for reasons:
    1. At $21.04, price is disadvantage to share holder. Very little or no premium at all.
    2. Round down conversion is also disadvantage to share holder. Dividend converted to share, balanced rounded or lost.
    3. Dividend converted to share. Share rounded down lost is also disadvantage to share holder.
    Only potential advantage to share holder is the possibility of DBS share price gain in future.
    My humble view to share.

    • Junior

      Hello! I think your points are valid.

      1. This is quite dependent on the price you bought DBS for. In your case, it seems to be higher than your entry price. So, it is a valid point.
      2. Again this would depend on the number of shares you bought and whether you get to round up or down.
      3. Quite similar to point 2.

      I would say there are more advantages than just an increase in share price. You would potentially be getting more dividends in the future. (Although it would be quite a small amount since you are a small capital share holder)

      Ultimately, it is up to you to decide whether the odd lots are worth it.

      Thanks for sharing your view! 🙂

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