For example, I received $83.34 in dividends for the month of December. Here
I used those dividends and reinvested it in KMI Here
Now here is my question.
I had 57 shares of KMI. Like so:
Notice the "Costbasis", "Basis", "Total Value" and "YOC" column.
Now I used the dividend received in December and brought 1 more share of KMI. Now I have 58 shares of KMI.
Since I only change the shares from 57 to 58. The only things that gets change are "Basis", "Total Value", "% Ch.","Weight","Annual Income" and "YOC" column.
My question to you guys is do I add the dividends I used to the "costbasis" column, or should I just change the shares column since I am using dividends to buy shares.
Here is what I think.
I think I should just change the shares amount because I am using money, dividends, that I did not have to buy more shares. The only time I change the "costbasis" column is when I use my own money that I received from work or other means beside dividends.
Please let me know what is the right way and why. Also please let me know if I need to clarify.
Your cost basis will indeed change, in this case upwards. Since the dividends you earned became "your money" (albeit briefly) and you chose to use that money to purchase a new share of KMI at the prevailing market price, you would average the price of that share into your cost basis just like any other purchase. Dividends are every bit as much your money as your work income you deposit into your account. To the taxman, you used personal funds (regardless of origin) to purchase a share of KMI at X price. That doesn't change just because you used dividends. If that were the case, then we could use dividends to buy overpriced shares of any company we wanted without affecting our cost basis. While that would be awesome, it's unfortunately not the case. If my cost basis on GE is 16.00 and I decide to use dividends to buy more shares today at 27.50, my cost basis does not remain at 16.00, it increases. Hope that helps.
ReplyDeleteThanks. Now I understand and made the adjustments in my portfolio page.
DeleteI agree with Anonymous. You paid money for the new shares (regardless of source of funds), and so that should be included in the cost basis. That will also change your cost per share basis, unless you just happened to purchase the new shares at the exact same price as your previous cost basis.
ReplyDeleteThanks for the input. :)
DeleteThe dividends are still like using your own money because if you didn't drip you would have received the cash. You are still taxed on the dividends regardless if you take the cash or drip the shares so you must adjust your cost basis by the amount of the dividend received.
ReplyDeleteThanks AAI I made the adjustments. Thanks for the input. I was really confused about it.
DeleteFor tax purposes, yes you need to account for the dividends in your cost basis. It's essentially a new purchase, you just didn't have to pay a commission on that. I track 2 basis' in my spreadsheet, one is purely the capital that I've invested in a company and one is all capital including reinvested dividends. That makes it easier for me to calculate YOC, YOP, % gain and total return very easily. YOP is just the capital I have invested so it accounts for dividends being reinvested. YOC is just the yield based off the DG. YOP = YOC if you don't reinvest but will get larger than YOC if you do reinvest. Nothing spectacular and I've seen YOC referred to as both. But I think you use Scottrade and their FRIP so that's going to mess with the accounting on that.
ReplyDeleteThanks PIP for the info. really appreciate it.
DeleteEveryone has pretty much nailed the solution to the situation already, so I won't repeat that. Otherwise, I'm glad you have been able to learn some more about managing your portfolio. That is one of the joys of being part of such an active and rewarding investment community.
ReplyDeleteW2R, yes that is one of the many joys of this investment community. We all share the same goal and working together to achieve it.
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