Saturday, March 26, 2011

Is all this trouble worth it?

Q.  My dad told me to be certain to keep track of all the reinvested dividends on the AT&T stock he gifted me about 8 years ago. He keeps asking me if I've kept records, and I must admit, at first I did, but then stopped as I have no idea why I need to go to this trouble. Is there a reason I really need to do this? JF, Nebraska

A.  Yes, because each time you reinvest a dividend, you are re-purchasing the stock. For example, let's say your gift had a tax basis of $5,000 when he gifted the stock to you. Let's say you decide to sell the stock this year, and you receive $7,000 for the shares. On the surface, that would seem like a gain of $2,000.

However, AT&T has paid a dividend ranging from $0.33+ cents a share to $0.43 cents a share since 2005. Each year, for each 100 shares owned, you would have received and paid an additional amount ranging from $132 to $172 in reinvested dividends. Using an average of $152 for 5 years = $760.  This increases your cost basis from $5,000 to $5,760, making the gain on your sale $1,240 instead of $2000.  If you are paying a 15% capital gain, the savings in tax amounts to $114. 

I realize my example is overly simplified and I didn't go back 8 years, but I think you can see the importance of keeping track of all re-invested dividends for any securities you may own.

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