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Dividends - Count toward cost basis?
Old 10-22-2010, 07:10 AM   #1
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Dividends - Count toward cost basis?

I realize that this may be an asinine question to many of you, but I want to make sure I get this right in order to ensure my cost basis and investment gain calculations are correct.

When my mutual funds declare a dividend and I enter that information into my Google Finance portfolio, would you recommend that I enter the dividend reinvestment price or ZERO for the transaction price (since it technically didn't cost me anything)?

I can kind of see the argument from both sides, so I'd like to defer to the undying wisdom of the folks here. Thanks so much for your help!
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Old 10-22-2010, 07:21 AM   #2
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At the dividend price. The dividend is income to you - you are using that income to purchase additional shares.
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Old 10-22-2010, 07:44 AM   #3
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Quote:
Originally Posted by bltkmt View Post
At the dividend price. The dividend is income to you - you are using that income to purchase additional shares.
Makes sense - thanks!
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Old 10-22-2010, 11:58 AM   #4
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dividend income is taxed as income

If you purchase 100 shares for $50 each ($5000) and then the dividend is $.10/share and share price is now $55, you have a new basis assuming the dividends were reinvested at $55:

$10 is added to the $5000 basis (100 shares times $.10/share is $10)

$5010 is your new basis
you have 100.1818 shares ($10 buys .1818 shares of stock)

Those 100.1818 shares (times new price of $55/share) is a value of $5510.
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Old 10-23-2010, 03:34 AM   #5
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Some mutual fund dividends (such as from REIT funds) contain a Return-Of-Capital component, which is not taxed at all but is deducted from your basis price when you sell the stock.
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Old 10-23-2010, 05:51 AM   #6
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You pay taxes on the dividends each year as you earn them. So you are buying new shares with after-tax money when you reinvest dividends, and the cost of those shares is added to your cost basis. If you didn't reinvest the dividends, you could have a check sent to you and go out and buy a nice cheeseburger with that money. So yes, the new stock DID cost you something!
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Old 10-23-2010, 06:18 AM   #7
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One of my college Physics professors gave me this little tidbit of wisdom...

"The only dumb question is the one that go un-asked."

I didn't know the answer to your question. I do now.
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Old 10-23-2010, 08:24 AM   #8
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One of my college Physics professors gave me this little tidbit of wisdom...

"The only dumb question is the one that go un-asked."
While not using those exact words, this was something I told new staff in my office when I was working. In return, I promised them I would never make them feel bad for any question they asked about something they were working on no matter how trivial it may seem.
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Old 10-23-2010, 08:41 AM   #9
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Originally Posted by jimday1982 View Post
When my mutual funds declare a dividend and I enter that information into my Google Finance portfolio, would you recommend that I enter the dividend reinvestment price or ZERO for the transaction price (since it technically didn't cost me anything)?
When I enter these transactions in a taxable account it is important to record the transaction price because you pay taxes on that amount and is added to the cost basis.
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Old 10-23-2010, 09:53 AM   #10
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I know nothing about Google Finance but it sounds like a general purpose database that can do lots of things including keeping track of your basis , in which case, you'd certainly want to input all the reinvestment info as everyone has said.

What you may be thinking of is a return on investment calculation like IRR where only external flows of funds are important.....like new fund investments or withdrawals. In the case of a reinvestment, you can think of it as old money and so ignore it........alternatively you can think of it as 2 separate transactions:
1) withdrawal of funds (like getting a check)
2) invest new $$$ of the same amount
However since these events happen almost simultaneously, the net result is as if there are no external flows of funds so you would get the same IRR doing the calculation both ways (no transaction/2 simultaneous transactions which offset each other).
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Old 10-23-2010, 01:30 PM   #11
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Gordian Knot solution:

My advice is to not automatically re-invest dividends. Problem solved. Life will be much simpler.

Reinvesting dividends can cause all sorts of unintended consequences/complications. I know, been there, done that.

Say one day your divs are reinvested for you. Two weeks later, you want to sell some of that stock to rebalance your asset allocation or whatever. If the divs were reinvested at say, $50.27 per share, and you sell at $50.26 per share, you just created a wash sale to enter and track on your Schedule D. Even if your average price was say $40 - those shares are gains, but the re-invested shares at $52.27 are a loss. They may need to be broken out separately.

With the tracking that some brokerages do now, this might not affect you based on the average price, but it could if you were on the edge, or had a loss on average. And you might lose that tracking if you change brokerages, I dunno. Bottom line - why complicate things?

Further, you may want to rebalance once a year anyhow. Let the divs accumulate in a MM, then when you choose, re-invest them wherever is appropriate. Now you are in control.


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Old 10-23-2010, 02:01 PM   #12
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I reinvest most dividends these days and before 2 years ago I always reinvested them either in the same fund or into another fund.

I use the FIFO method for selling shares, so if I received dividends which got reinvested somewhere and then sell or redeem shares a short time later, the shares I am selling will be those I bought (or acquired via dividend reinvestment) years ago. This method also boosts the chance of having gains which are taxable at the lower long-term cap gains rates.

I made a spreadsheet for each fund which helps me keep track of which shares are the earliest ones I still own and are next up when I make a sale. It makes no difference if I bought those shares via a check or via a dividend reinvestment. I simply compare the price I am selling the shares to the price I acquired them to see if I had a gain or a loss. The spreadsheet calculates all the info I will need to post on Schedule D of the federal income tax form.
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