- posted 10 years ago
Last year I bought a closed-end, exchange traded fund that invests in emerging market debt. (Morgan's Stanley's EDD.) The fund pays a quarterly dividend.
My year end statement indicates the dividends for the second and third quarters of 2009 were "return of capital."
I understand how return of capital works, I understand it's not taxable, and I'm familiar with the concept of "managed distributions" from fixed income funds.
But I'm hazy on how the return of capital affects my basis. I realize that return of capital reduces my basis. But I reinvest dividends and that has my scratching my head.
I use the average share price method of tracking my basis, as opposed to figuring a basis for each individual block of shares. So it seems to me it works this way:
The fund returns $X of my capital.
This reduces my basis by $X.
I chose to reinvest $X in Y shares.
My total cost for all the shares I own stays the same, but the number of shares increases by Y. Therefore, my average cost per share decreases.
On my spread sheet, I list the price of the shares I purchased when reinvesting the returns of capital as $0.
Am I doing this correctly?
Thanks in advance for any guidance from the group.
Paul Michael Brown Washington, D.C.