Due to Covid, DBS has lowered the dividend payout since August 2020. They also introduced the Scrip Dividend Scheme which provides shareholders with the option of receiving their dividends in the form of shares instead of cash. In this article, I will talk about how I maximize the amount of value and dividend yield received by using the rounding exploit from the DBS Scrip Dividends.
The change in share price can affect the value of taking up Scrip but in this case, we will just assume the price of the share will not vary too much.
DBS Scrip Dividends Partial Redemption
The special thing about DBS’s Scrip Dividends is that they allow for partial redemption. What this means is that you will have three options in claiming your dividends.
Let’s assume that you have 1,000 DBS shares.
The dividend per share is S$0.18 per share.
The Scrip share price is S$29.54.
Option 1 – Receive All In Cash
In option 1, you will receive S$180 of dividends.
Calculations
1,000 shares X S$0.18/share = S$180
Option 2 – Receive All In Shares
In option 2, you will receive 6 shares.
Calculations
1,000 shares X S$0.18/share / S$29.54 = 6.09 shares (rounded down to 6)
Take note that if the amount of new shares issued includes a fraction, it will be rounded up to the nearest whole number if the fraction is 0.5 or more.
Option 3 – Receive A Mix In Shares And Dividends
Let’s assume that you prefer to receive 500 shares worth of dividends and 500 shares worth of shares. The number of shares redeemed can be changed based on the ratio you prefer.
In option 3, you will receive S$90 of dividends and 3 shares.
Calculations
500 shares X S$0.18/share = S$90
500 shares X S$0.18/share / S$29.54 = 3.15 (rounded down to 3)
Taking Full Advantage Of The Rounding Exploit
When you are redeeming either full shares or partial shares, if the amount of shares is rounded down, you are losing out.
DBS’s Scrip Dividend is special because they allow partial redemption and they round up any fractions 0.5 and above. You can mix and match the amount you would like to receive in cash and/or dividends. Allowing the rounding up of the fractions above 0.5 is crucial for this exploit.
I did this for the last three dividend payout in August 2020, November 2020 and April 2021. As long as there is a Scrip Scheme with rounding up available, I will continue to take advantage of it in the upcoming dividend payouts. I currently have 102 (with 1 share pending) shares of DBS as a result of making use of the rounding exploit.
How To Maximize Your Value Using The Rounding Exploit
You will need to either take partial shares/dividends or full shares to take advantage of the rounding.
The formula used for the DBS Scrip Dividends is
New shares entitled = (S$0.18 X number of shares allocated) / S$29.54
Basically, we are trying to earn an additional 0.5 shares of DBS (worth approximately S$14.50 a the time of writing) by rounding up.
For easy comparison, I will present two cases.
- Opting to take 1 share and the rest in dividends
- Opting to take full shares and the rest in dividends
I have done the calculations over a range of shares owned.
Case 1 – 1 Share And The Rest In Dividends
As you can see, the total value is higher when you take advantage of the rounding exploit.
Case 2 – Full Shares And The Rest In Dividends
In this case, it is also the same. The total value is higher than taking 100% dividends or shares.
Overall Comparison
If you take a look at this chart that compares the total value, there is a clear advantage in making use of the rounding exploit. This is especially so for the lower amounts of shares owned. If you own 100 shares, you can increase your yield by more than 80% as compared to take pure cash dividends. Not only that, increasing the number of shares held will increase the next dividend payout aka the power of compounding without the transaction fees.
However, the amount of advantage you gain from the rounding gets lower as the number of shares owned is higher.
The Downsides Of The Rounding Exploit
By taking advantage of the rounding exploit, although you can get a higher total value, you will be left with odd lots of shares. SGX currently only allows trading in minimum lot sizes of 100. Currently, selling odd lots of shares in the Singapore market is expensive.
If you value cash more or you don’t want to hold on to odd lots, the rounding exploit is not suitable for you.
For me, I don’t mind getting lesser cash in return for an almost 80% higher dividend yield. I am willing to take the risk and wait for the day for SGX to allow smaller lot sizes of 10 to eventually 1 share.
TL, DR
You can gain a higher dividend yield of up to 80% by taking advantage of the rounding up exploit. You will want to calculate the number of shares so that the number of shares received will be as close to X.50 as possible so that it will be rounded up.
Things to consider
- Value vs liquidity
- Whether the shares are worth holding long term
- Price of the share vs the Scrip share price nearing redemption
If you do not want to deal with odd lots, prefer liquidity or do not think that the share is worth holding long term, you will be better off getting the full cash dividend.
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