Hi, Bob.
We've discussed reinvested dividends here several times recently. You should be able to find some of those discussions in the archives.
Q2005 has an investing transaction type called "Reinvest - Income Reinvested", but I've not had occasion to use it.
Even when reported and recorded as a single-line entry, a reinvested dividend is actually two transactions. The dividend itself comes first, generating some cash in the account. Then, new shares are purchased, using that cash. After both transactions, your cash balance is again zero (or unchanged, if there was cash there before). Your Dividend Income Category is increased by the amount of the dividend, and your Cost Basis in your Investment Account is increased by the same amount. The dividend income is taxable to you, and your capital gain on sale of the shares is reduced by the amount of the cash reinvested.
There are at least two philosophies as to how reports of your investment yields should reflect the reinvested dividend. An oversimplified example might illustrate the difference.
Assume you purchase 100 shares at $10 on January 1. On July 1, you get a dividend of $1 per share, which is reinvested in shares which cost $11 per share at that time. Your $100 reinvestment purchases 9.091 shares, bringing your share balance to 109.091, and this does not get changed before the end of that year. Assume the shares double in market value to $20 at December
31, so your $1,000 investment grew to $2,181.82. What was your return for the year?
One way to calculate this is to simply divide the ending value by the initial cash investment and conclude that your return was 118.18% A variation is to include any other out-of-pocket investments added during the year, but that was zero in this case, to the result is the same.
The other way is to recognize that you could have accepted the $100 dividend in cash. If you had, your year-end balance would have been just the original 100 shares, worth $2,000.00, plus the $100 cash dividend, plus whatever the $100 might have earned in a different investment. (Of course, this could have been zero, because you might have spent the $100 on dinner and a movie.) Your yield might have been calculated as an even 100%.
But, since you DID reinvest the $100, maybe your yield calculation should reflect that you had $1,000 invested for the first 6 months and $1,100 invested for the last six months to produce the $2,181.82 ending balance. So your Return on Investment would be less than 118.18%. (Q2005 calculates it as 118.65%, but maybe I'm doing it wrong. I often can't get the same answers as Quicken on investment yield calculations. And I can't find my financial calculator and I'm too lazy to look up how to calculate ROI and other performance measures. I've been retired too long.)
My point is not the actual calculation, anyhow, but only that there are multiple ways to think about what the answer should be.
RC