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Please note that tax, investment, pension and ISA rules can change and the information and any views contained in this article may now be inaccurate.

We explain the difference between Scrip and Drip dividend schemes

Scrip dividend schemes offer shareholders the option to increase their investment in a company by receiving dividends in new shares rather than cash. They are different to Drip schemes and dividend reinvestment services offered by your stockbroker, as we now explain.

Scrip distributions are generally acknowledged in the form of fractions paid per existing share. For example, a company might issue a scrip dividend of 0.05 shares for each single share held by existing investors.

‘Scrip schemes provide shareholders with an opportunity to increase their shareholding over time at no cost,’ explains Kevin Firth, managing director at Computershare Investor Services.

‘There is no stamp duty for the shareholder to pay, and no commission cost to the shareholder for acquiring the shares, making such schemes very popular with shareholders with particularly small holdings.’

Many stockbrokers or investment platform providers do not support this method of dividend payment for their customers. It is worth understanding how a Scrip scheme works, even if you cannot participate in one. That’s because the dividend payment method dilutes all shareholders in a particular stock.

An increased number of shares in issue will reduce an existing investor’s proportional ownership in that company.

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Which companies offer Scrip schemes?

BP (BP.) is one of the biggest companies currently offering a Scrip dividend programme.

Other FTSE 350 companies running scrip dividend schemes include banks Barclays (BARC) and HSBC (HSBA), construction group Costain (COST) and retailer Debenhams (DEB).

Scrip schemes are often offered by companies to avoid paying out too much of their cash as they might have other needs for that money.

‘Companies using Scrip schemes can retain cash, as there is no need for them to pay money to shareholders who decide to take their dividend in shares,’ says Firth.

Is there a tax advantage with Scrip dividends?

Although Scrip dividend schemes offer a cost saving when it comes to acquiring new shares, there are no particular tax advantages to signing up to a scrip dividend scheme.

Scrip dividends are treated as taxable income in exactly the same way as if the dividend was paid as cash.

Dividend income received by individual shareholders is taxed at 7.5% for basic rate taxpayers, 32.5% for higher rate taxpayers, and 38.1% for those who fall into the additional rate band.

A £5,000 tax free dividend allowance was introduced in April 2016. This allowance was meant to reduce to £2,000 at the start of the 2018/19 tax year but the Government has put that amendment on hold as part of wider delays to its Finance Bill.

How are Scrip shares added to my investment account?

Investors can either hold shares directly with a company which offers a Scrip dividend scheme or they have the option to put their Scrip dividends into ISAs or pensions.

‘How this is done will depend on how the shares are held – directly, or through a broker or custodian or wealth manager,’ says Michael Kempe, chief operating officer, shareholder solutions at Capita Asset Services. ‘If you hold the share directly you’ll need to put them in your ISA yourself.’

While many shareholders own shares directly, others will do so via their broker’s nominee account. It depends on the broker, but investors who hold shares in a nominee account should be able to participate in a company’s Scrip scheme.

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Cruise ship operator Carnival offers a Drip dividend scheme

What is a Drip scheme?

Many companies on the stock market have withdrawn their Scrip dividend schemes and instead set up dividend reinvestment plans (Drip schemes) to facilitate shareholders wanting to reinvest their dividends.

The operator of the Drip (typically the company’s registrar) pools the cash dividends payable to shareholders who have chosen to use the plan, purchases shares in the market and allocates them to the shareholders.

There is typically a charge of 0.5% to 1% of the value of the shares bought. To participate in the scheme your name must appear on the company’s share register.

‘The difference between a Scrip dividend scheme and Drip is that a Scrip dividend reinvests the dividend at a fixed rate, determined in advance of the dividend pay-date,’ says Neil Evans, head of middle office at financial services firm Killik & Co.

‘A Drip uses the cash dividend received on the pay-date and purchases the new shares at the prevailing share price on that day.’

There is a broader range of companies on the stock market offering Drip versus Scrip dividends. For example, cruise ship operator Carnival (CCL) and media giant Sky (SKY) offer Drip dividends, according to share registrar Equiniti.

What about stockbroker reinvestment schemes?

In some cases, investors will want to reinvest dividends for stocks where the company doesn’t run a Scrip or Drip Scheme.

This can be done by using a stockbroker which runs a dividend reinvestment scheme, such as AJ Bell Youinvest. It offers customers the ability to use dividend cash to automatically buy more shares from only £1.50 per transaction. (EL)

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