Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.

Recs

2

Do Stock Dividends Affect Cost Basis?

Cost basis is an important element of every investment you own, as it helps determine whether you'll have a taxable gain or loss when you sell. But many investors get confused about how dividends -- whether they be stock dividends or cash dividends -- affect cost basis. Let's take a closer look at the question to get you the answers you need to know.

What is cost basis?
The cost basis of an investment is the total cost of that investment, including the amount spent to purchase it, any commissions or fees associated with that purchase, and any other related costs. For tax purposes, the cost basis of an investment can be reduced by certain items, but only rarely. Most common (for businesses) are depreciation and depletion (e.g., oil, timber, minerals depletion allowances).

Accounting for cost basis reveals the true returns of investments, as high commissions or fees, either from high fee structures or frequent trading, reduce the net returns of the investment.

What dividends do to cost basis
Different types of dividends have different effects on cost basis. Cash dividends do not lower the cost basis of an investment, either when you actually receive cash or when you use the proceeds to purchase new shares. A stock dividend, however, does adjust cost basis, as does a "return of capital."

As an example, suppose you buy 37 shares of a company at $45. Your broker charges you $7.99 in commissions to handle that transaction for you (hey, they gotta eat too). What is your total cost, or basis?

Easy. 37 x $45 + $7.99 = $1,672.99. This works out to be $45.216 per share.

Cash dividends, as noted, do not reduce your basis, despite what the historical price section on Yahoo! Finance indicates (that's just to make it easier to calculate what total returns would be including reinvested dividends). However, splits and stock dividends do. For an example of the latter, see the dividends page.

For a split (like 3:2 or 2:1 or 3:1), you increase the number of shares by the split factor, which necessarily reduces the per share cost basis. Suppose that stock you purchased above splits 3:1. Your new basis would be $1,672.99 / 111 shares = $15.072 per share, now. (But your total basis, $1,672.99, remains the same.)

As confusing as cost basis can be, dividends don't have to be overly intimidating. As long as you remember which types of dividends affect basis and which don't, you'll be in the best possible shape to handle tax issues when the time comes.

Get more income to deal with tax issues
Taxes are always a challenge, especially once you retire. But smart moves can offset tax costs. A Seattle couple recently discovered some little-known Social Security secrets that can boost many retirees' income by as much as $60,000. They were shocked by how easy it was to actually take advantage of these loopholes. And although it may seem too good to be true, it's 100% real. In fact, one MarketWatch reporter argues that if more Americans used them, the government would have to shell out an extra $10 billion... every year! So once you learn how to take advantage of these loopholes, you could retire confidently with the peace of mind we're all after, even if you're woefully unprepared. Simply click here to receive your free copy of our new report that details how you can take advantage of these strategies.


Read/Post Comments (0) | Recommend This Article (2)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 3392650, ~/Articles/ArticleHandler.aspx, 7/6/2015 10:46:49 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 1 hour ago Sponsored by:
DOW 17,683.58 -46.53 -0.26%
S&P 500 2,068.76 -8.02 -0.39%
NASD 4,991.94 -17.27 -0.34%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes


Advertisement