OCBC scrip dividend received today

This is a review post about OCBC Scrip dividend Scheme.
100 of OCBC shares from the payment of Scrip dividend was credited to 穷小子's CDP account today. Including this, it would be the third time 穷小子 had opted for Scrip Dividend Scheme.
The decision made in May to opt for shares has been right so far.

To recap, the scrip dividend price is $8.11, the price which is after the 10% discount from the determined price at $9.01.

Dividend Announced	$0.18 per share
Cash dividend value	$810.18
Amount of shares received via Scrip Dividend	100
Determined Price for Scrip Dividend (after 10% discount)	$8.11
Scrip Dividend Price as of 28 Apr 2016	$811.00
Last Closed Price	$8.45
Scrip Dividend Price as of today	$845.00

For anyone who needs the events timeline information

If 穷小子 have opted for Cash dividend instead, he would have received $810.18 only, rather than the value of $845.00 today. Although it seems to be a difference of $34.82 only, it is actually an additional of 4.29%.

Moreover, this 100 of OCBC shares will be included in the formula for computing the next scrip dividend which usually falls on August, about two months from now on. Let it Grow! Let it Grow!

The power of Scrip dividend and Compounding effects.

 

OCBC Scrip Dividend Scheme

After waited for more than 2 weeks since XD date, have received the letter of notice for my scrip dividends from OCBC today. Finally.

What is scrip dividend?
Investopedia: A stock dividend is a dividend payment made in the form of additional shares, rather than a cash payout.
穷小子: Basically is payment to you by shares instead of cash for dividends.

From what I know, the 3 local pillar banks (DBS, OCBC, UOB) stocks may give their shareholders an option to choose between payment by shares or cash for each round of dividends payment. No, scrip dividend is not a mandatory for every year, it is a decision by the management and is one of the resolutions which the shareholders had to vote during the Annual General Meeting. In short, we wouldn't know whether the company would still have scrip dividend for next year until the next AGM.

How is the number of OCBC shares determined?
There is a formula for this actually. Using the amount of dividend (cash) which supposed to receive, divided by a 10% discount to the price which was determined during the price determination period, from 26 April 2016 to 28 April 2016 (both dates inclusive).
The price was determined at $9.01 for this round of dividend. which gives you a $8.11 after the 10% discount.
E.g. Supposing should you received $405.50 as cash dividend, you will have entitlement of 50 OCBC shares as scrip dividend scheme.

Should take up scrip dividend or cash dividend?
Let's weight some of the pros and cons which I can think of now if choose to receive in scrip dividend.

Pros

• The determined price is still lower than the market price, which is $8.33 as of today closed price.
• Although it became less than 2.5% discount instead of the 10% discount, we still had a free $0.22 per share from the scrip.
• Fractional entitlements to a hundredth of a share or more will be rounded up to the nearest whole share. E.g.
  - 50.01 shares will be rounded up to 51,
  - 50.009 shares will be rounded down to 50 shares.
• Is a good method for compounding if you are looking it as a long term investment.
• Saves all the commissions and fees for the buying and selling transactions if one chooses to reinvest the dividend.
• The value of the shares from the scrip dividends may increase in future. So long the price is more than $8.11, it means is in paper profits already.

Cons

• No cash received, means no actual gain realised. Cash is King, some may say.
• It may no longer to be seen as a 10% discount, because of the market price is getting nearer to $8.11. Might as well take the cash first and plan for the next move.
• There will be odd lots in resulted, which may be inconvenient to sell in the market.
• The value of the shares from the scrip dividends may decrease in future. If  the market price is less than $8.11, it is "eating" up the dividends, which means is in paper loss.

Scrip dividend or Cash dividend? You make the call.

This is the third time which I will opt for scrip dividend. Okie, I am bias, I can't think of much cons for this. It is a brown form this time instead of the green form which were received previously. Maybe because I had made a standing instruction for receiving scrip dividend as my permanent election for all my subsequent dividends until further notice.

Errmm. One more Pros pointers for 穷小子. He was entitled 100 shares for this round of scrip dividend, no odd lots for this time.

Investment Link Plans, Buy or Bye

I personally don't like the Investment Link Products (ILP) offered by the insurance companies. I took the illustrations of benefits page and compared with my formula of compounding effects, the returns are almost the same. Perhaps the main difference is my method doesn't have the "effects of deduction" and "cost of distribution" column which will be deducted from the returns, in which means their fees and commissions in my layman terms.

Moreover, I don't think the portfolio will be maintained by those high-profile funds managers. It could be some normal staffs, or even grads with only few years of experience, maybe? There is no guaranteed one can make profits from ILP. Under worst case scenario, why let others (strangers) to lose your hard-earned money? Why not believe in yourself and start investing? More or less the same logic as what they are doing.
In my view, insurance companies are meant for insurance products. As for the investments products, I am not saying that you shouldn't buy it, but do your own homework first if you choose to buy.

Unfortunately, I have two of these kinds of policies which I had bought 10 years ago. The returns have not break-even yet, regretted buying them though, but let's moved on.

P.s. You would feel so much better if the money is lose by yourself rather than letting some strangers to lose your money. *touch wood*

Power of Compounding

Power of compounding. As some of you may or may not heard of. In simple terms, meaning to reinvest the gain(interest/dividend) from the principle amount which earned and reinvest them again and again. In another words, compounding effect - refers to generating earnings from previous earnings.
One may improvised it, optionally, may choose to periodically deposit the initial same amount of money together with it too.

Let's say initially I had $1,200 to begin with. I gained an dividends of 4% annually from stocks, and I reinvest them with my initially. After the first year, I gained $48, and deposit another $1,200 with it.

After 20 years...

Year	Deposit	Interest	Total
1	$1,200.00		$1,200.00
2	$1,200.00	$48.00	$2,448.00
3	$1,200.00	$97.92	$3,745.92
4	$1,200.00	$149.84	$5,095.76
5	$1,200.00	$203.83	$6,499.59
6	$1,200.00	$259.98	$7,959.57
7	$1,200.00	$318.38	$9,477.95
8	$1,200.00	$379.12	$11,057.07
9	$1,200.00	$442.28	$12,699.35
10	$1,200.00	$507.97	$14,407.33
11	$1,200.00	$576.29	$16,183.62
12	$1,200.00	$647.34	$18,030.97
13	$1,200.00	$721.24	$19,952.21
14	$1,200.00	$798.09	$21,950.29
15	$1,200.00	$878.01	$24,028.31
16	$1,200.00	$961.13	$26,189.44
17	$1,200.00	$1,047.58	$28,437.01
18	$1,200.00	$1,137.48	$30,774.50
19	$1,200.00	$1,230.98	$33,205.48
20	$1,200.00	$1,328.22	$35,733.69
Total	$24,000.00	$11,733.69

After 20 years, I put in $24K, but I have accumulated $11,733.69 dividends, which is 48.89% profits. Free money!!

Not enough? See the power just after 5 more years later.

21	$1,200.00	$1,429.35	$38,363.04
22	$1,200.00	$1,534.52	$41,097.56
23	$1,200.00	$1,643.90	$43,941.47
24	$1,200.00	$1,757.66	$46,899.12
25	$1,200.00	$1,875.96	$49,975.09
Total	$30,000.00	$19,975.09

5 years later, dividends became $19.975.09, 66.58% of free money. What if I continue for 5 more years

26	$1,200.00	$1,999.00	$53,174.09
27	$1,200.00	$2,126.96	$56,501.06
28	$1,200.00	$2,260.04	$59,961.10
29	$1,200.00	$2,398.44	$63,559.54
30	$1,200.00	$2,542.38	$67,301.93
Total	$36,000.00	$31,301.93

After a total of 30 years, you could have $31,301.93 of free money, 86.95%!!

It may took 30 years to have 86.95% profit, sounds too long, but it is only $100 per month and it is free.

If you had started early, another 5 more years to make it 35 years, you would have a return of 110.43%. In another words, you have earned back your principle amount, any thing from there onward is free money of the free money!! The power of compounding gets more powerful at the later stages.

Lastly, the data shows much clearer after it was populated into a graph.


Trust me, I counted that, although there might be slight differences in actual case.

Warren Buffett once said that he wished he had started investment earlier.
Btw, he bought his first stock at 11 years old.
Youth is wealth.