Dividend Reinvestment Plan (DRP) is very new concept in Malaysia, till now, only two company provide DRP, namely Maybank and AMMB (one more REIT company going to implement DRP soon). This is suitable for those who think they do not have time to monitor the stock market or read through the research reports and ideally want to keep on invest the great company for next few years.
From the history record, in US, if someone invested Pepsi in 1980, $2000 with became $150,000 at 2004. (start with 80 shares will become 2800 shares through DRP)
If invested Philip Morris in 1980, $2000 will worth $300,000 at the end of 2004. (start with 58 shares, turn to 4300 shares) - data took from Ibbotson Associates:
What is the advantage DRP to investor?
Since last year, Maybank gave share holder an option to choose, share or cash during dividend announcement. Those who opt for DRP will entitle to buy share with the dividend pay at 10% discount from VWAP. For example, current share price for Maybank is RM8.70, those who opt for free share is base on RM7.70. Hence, every dividend you can reinvest with 10% discount and no need to pay brokerage. Sound great?
DRP will also cause share price become more volatile. Just monitor the stock price before dividend announcement, after Ex Date and Payment date. This is another opportunity for those who would like to trade on this stock.
DRP work best if you want to invest in great company and don't foresee to sell for few years - the convenience, easy and cost effective way to build share holding by using cash dividend to buy additional shares.