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How to Reinvest Dividends & Taxes

Original post by Dale Bye of Demand Media

Dividend reinvesting provides investors with the best opportunity to get the most out of their portfolios. In most cases, reinvesting dividends in individual companies carries no commission, so you lose nothing to commissions or fees in the transfer of cash to investment. There are three primary methods of dividend reinvestment programs: dividend reinvestment plans (DRIPs), direct share purchase from a company, and using a dividend reinvestment broker. You can instruct your broker to reinvest dividends. However, keep in mind that dividend reinvesting carries come tax implications you must monitor.

Contents

Direct Share Purchase

Step 1

Choose the company in which you want to invest.

Step 2

Visit the company's website. Click on the "For Investors" or "About Us" link to see if the company pays a dividend and offers a direct purchase plan.

Step 3

Request or download the plan information from the company, or its plan's administrator.

Step 4

Decide how much to invest initially. Many direct stock purchase plans allow you to invest in dollar amounts rather than by the number of shares. This can result in fractional shares, instead of share blocks.

Step 5

Make sure you know how to make additional investments. Many plans allow you to sign up for automatic additional investments.

Dividend Specialist Broker

Step 1

Look into brokers that specialize in dividend reinvestments. Check the investment commission and fee scales. Such brokers typically offer a per-transaction fee as well as monthly, quarterly or annual fees.

Step 2

Choose a dividend reinvestment broker you want to use.

Step 3

Go to the brokerage's website and get account-opening information.

Step 4

Decide how much to invest and whether you want to make periodic, regular investments.

Step 5

Choose the stocks in which to invest.

Traditional Brokerage

Step 1

Ask whether your brokerage offers dividend reinvestment. Check the fee structure, if any.

Step 2

Choose the stocks or mutual funds in which you want to reinvest dividends.

Step 3

Notify your broker to reinvest any dividends. You likely can do this on the broker's website.

Tax Implications

Step 1

No Tax Deferral: Reinvesting your dividends does not mean you delay paying taxes on dividends. Check your brokerage 1099s for dividend payment information. If you participate in a company's direct stock purchase plan, make sure you receive a 1099-Div form from the company before filing your tax return.

Step 2

Each time you reinvest dividends you create a small new tax lot. When you sell shares, you must specify which tax lot you are selling. Or, if you sell your entire amount, you must factor the dividend reinvestment into your tax basis.

Step 3

Avoid wash sales. If you decide to sell shares from a taxable account in a down market in order to bank a capital loss, the IRS precludes you from buying shares 30 days before and after the sale. If you're in a DRIP program, you won't be able to claim the loss on dividend reinvestment shares purchased in the 30-day window before the sale. And if you receive dividend reinvestment shares after the sale -- the ex-dividend date is usually at least a week before the dividend is paid -- it will invalidate the loss for the entire sale.


                   

Tips & Warnings

  • If you plan to sell to use a tax loss from a brokerage account, turn off the dividend reinvestment option as far ahead of the sale as possible.

Things Needed

  • Computer
  • 1099 Tax Forms

Resources

References

About the Author

Dale Bye has spent over 40 years in journalism, including 25 supervising reporters and editors at metropolitan newspapers and eight years as Senior Managing Editor at a national sports magazine. He directed five newspaper-sponsored personal finance fairs. His fields of expertise include business and personal finance, sports, fitness and theater. Bye holds a Bachelor of Journalism from the University of Missouri.


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