Dividends and Spin-offs
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Dividends and Spin-offs Our investment club uses NAIC’s account software and we also upload it to our clubs web-site at Bivio. Could you please explain why the Cost Basis per Share increases after I enter the dividends paid out by a company? My thinking is that the average price should go down because the dividends are reinvested in the stock for us at no charge. Also, companies that Spin-off a stock, (WCOM and MCIT) do I enter in a purchase price for MCIT if I never paid for it? Thank you for your help, Sam Anastasio Hi Sam,
You wrote....
Our investment club uses NAIC's account
software and we also upload it to our clubs web-site at Bivio. Could you please
explain why the Cost Basis per Share increases after I enter the dividends paid
out by a company? My thinking is that the average price should go down
because the dividends are reinvested in the stock for us at no
charge.
Reinvesting dividends is really two transactions
rolled into one.
First, it is treated as a regular dividend.
You pay taxes on that dividend income just as you would any other
dividend. You are then free to do what you want with those
funds.
Secondly, you take those dividends and decide
to buy additional shares with a dollar amount that happens to equal the dollar
amount of your dividend. This purchase is no different than any other
purchase of stock. The dollars invested increase your cost basis.
Also, companies that Spin-off a stock,
(WCOM and MCIT) do I enter in a purchase price for MCIT if I never paid for
it?
Yes, the software uses the price for two
purposes. First, the price is instrumental in the calculation of the
allocation of cost basis between the two companies. For more information
please see "Spin-Off" at http://www.bivio.com/hp/investment-transactions.html
Secondly, that price is used to determine the value of the spin-off company on
the date that you first received it and the performance of that investment going
forward.
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