Sr. Citizen Question

You have a pretty good understanding. Yes, the additional shares and fractions of shares bought with reinvested dividends have their own cost basis which is the amount of reinvested dividend plus any transaction cost.

And it can be messy to keep track. And if there's a transaction cost, you need to reinvest lots to keep the transaction cost per share low.

In a few years the companies will have to keep track for you, and that will make it less messy, but if messiness annoys you, and it sure annoys me both personally and professionally, you can ignore the dividend reinvestment offer.

About twenty years ago the Wall Street Journal had a long story on the trials and tribulations of dividend reinvestment plans, and I can attest from seeing the data kept by many clients that it can be a royal pain. Although as mentioned above in a few years it will be easier.

Correct.

You either maintain a spreadsheet or ask the corporation if they keep tarck for their stockholders. Either way, the burden is on you.

You can not cost average shares of stock. Cost averaging is available for mutual funds.

Yes will receive a 1099-DIV that reflects the dividends you received. You just used the funds to but more shares.

When you sell those shares, you compute your gain or loss based on what you paid for those shares. You also use the holding period for those shares. Any shares purchased via dividend reinvestment that you haven't held for more than one year on the date of sale would be a short-term transaction.

Further, if you don't sell all the shares at once, you have to perform a FIFO (first in, first out) calculation because by default[*], you are considered to have first sold the shares held longest (probably the ones with the greatest gain). Every purchase, including dividend reinvestment, must be tallied up in chronological order and applied against the sale.

There are commercial services such as Gainskeeper that can help calculate this for a fee. They maintain a database of all historical prices, dividend payments, stock splits, etc. So you can put in your original purchase amount and date, and have the basis calculated for you.

Yes, it is a pain. I have a client who has shares of GE and uses the account like a savings account -- depositing spare cash (purchasing shares) every so often, and then taking out (selling) round dollar amounts as needed. Lots of burdensome calculations.

If you sell all the shares at once, then you simply add up your original purchase price plus all the 1099-DIV amounts you have been taxed on, that's your basis (and everything except the last few dividend reinvestments will be long-term).

-Mark Bole

It can be a big hassle to keep track. That's why I don't do dividend reinvestment plans for stocks (except for a couple that I am forced to do so. I use a software to keep track.). So if you have the option, why not take the dividends in cash as you have been doing, and buy the stock when you want to.

That's why many people do this in their retirement plans - since cost basis doesn't matter for them.

So does the specific lot declaration that Mr. Bole mentioned.

Also, watch out for any stock-splits that have occurred. 40 years is a long time.

What everybody has said!!! I have some AT&T stock dating back 40+ years, with some dividend reinvestments until I got wise and figured out it was more trouble than it was worth. I have a stack of single- spaced pages showing every reinvestment, stock splits, and the divestiture/ breakup of AT&T and then its remerger from some of the divestiture remnants. If I am lucky, I will die before I need it and my heirs will get the shares at the price on the day of my death, and they will be better off that way.