The Scrip Dividend Scheme has been employed by multiple companies in Singapore this year to preserve cash and many investors were given the choice of getting dividends in the form of cash or shares. This presents a potential dilemma as it appears to be an obvious choice to pick shares over cash. However, I am also aware that there are investors who prefer cash over shares due to various reasons. As such, it would be ideal to do this week’s post on the pros and cons of taking either cash or shares over the other. Besides that, I will also collate the responses I received so far to share both perspectives as much as possible.
Shares offers more value on the long run
It is true that shares will be more valuable over the long run because of two main reasons. Firstly, shares have a much higher potential for price appreciation compared to cash which is constantly beaten up by inflation. Secondly, picking shares over cash will result in higher dividends for future payouts as well. That said, the impact of this appreciation and increase in dividends received is highly dependent on the number of dividends you will be actually receiving in the upcoming payout. This means that if you were to be receiving a small amount (relative to your holdings) of shares in odd lots, then there is a high chance that the slight increase in your number of shares is inconsequential. Of course, there is an ongoing discourse about compound interests which is highly attractive however if you are excited about relatively small gain, then my best advice to you would be to try and get a higher income rather than aiming for such gains.
Odd Lots are more expensive to sell (choosing shares might result in inconvenience)
Let’s say if you would like to sell the shares you got via the Scrip dividend scheme, you would not be able to sell it via the brokerage apps like DBS Vickers and iOCBC because the minimum lot size is 100 shares. Therefore you would require your broker to help sell your shares using odd lot trading and those require a slightly higher commission compared to non-broker assisted means. There is always an option to hold your shares forever as well but that would probably take a long time before those few shares can return you enough cash to breakeven.
Are the price of the SDS shares cheaper than the current share price?
When the companies send you a letter with regards to the scrip dividend scheme, they will list the price of the shares that they will be awarding to you if you pick shares over cash. Therefore, you can always check the current share price to see if it is worth it or if the shares awarded will be able to average down your average share price for that particular counter. Bearing in mind that the impact would probably be minute as the number of awarded shares will only be a small fraction of your actual holding (I.e. dividend yield). Hence even if it might make logical sense to pick shares but the benefits might not be significant even in the long run.
Closing Thoughts
As a rule, I always pick cash over shares if the impact of the new award shares is insignificant in my regards. I feel that there is an over-romanticization of compounding interest because the benefits are just too small for some investors to make sense. As such, I would recommend investors to make their decisions based on the size of their holdings and if they intended to hold for the long term or planning to sell it off at a slight premium if the share price goes up. Hopefully, my candid sharing can help you guys gain better clarity when it comes to choosing either option.
