Dividend Reinvestment Plans

There are many companies that offer dividend reinvestment plans.  These are "automatic share buy orders".  Instead of receiving dividends from the company in the form of cash, you will receive shares, generally purchased at the current market price.

I will never participate in a dividend reinvestment plan.  The reason is simple.  To me, a good investment strategy will only buy assets when they are cheap.  Any given "now", without any consideration of price, is not likely to be cheap.  So, you may end up buying shares when they are not cheap, or, at worst, when they are bloody expensive.

So, why then do so many companies offer a dividend reinvestment plan?

Well, I think it is a cheap management trick to pump up the share price.  If a company can cause a continual buying trend, share prices will tend to rise (until the scales tip back towards balancing with earnings).

The problem though, is that management should not be concerned with the price of the company shares.  "Ahhh, but they are!" I hear you say.  And you're right.  Often Executive bonuses are linked to the share price of the company.  This is stupid.  Shareholders should let management focus on the profitability and growth of the company, and then the share price will take care of itself.  If shareholders vote for short-term reward structures, they will get short-term focused management - to the detriment of the long term performance of the company.

The problem with short-term focused management should be obvious.  CEOs that maximize their bonus before walking out the door leaving a hell of a mess behind.  This is definitely not in the interest of shareholders.

So, as a shareholder:

• I will always vote against the introduction of a dividend reinvestment plan.
• I will be wary of any management that suggest the introduction of a dividend reinvestment plan.
• I will always vote against executive remuneration linked to short term objectives, such as share price.
• I will never participate in dividend reinvestment plans.

Until I change my mind..

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