About Me

A blog wherein a literary agent will sometimes discuss his business, sometimes discuss the movies he sees, the tennis he watches, or the world around him. In which he will often wish he could say more, but will be obliged by business necessity and basic politeness and simple civility to hold his tongue. Rankings are done on a scale of one to five Slithy Toads, where a 0 is a complete waste of time, a 2 is a completely innocuous way to spend your time, and a 4 is intended as a geas compelling you to make the time.

Thursday, January 14, 2010

High Finance, Part 2

On the personal side of things...

I've always been a big fan of dividend reinvestment, where you take that $6.82 and buy a quarter of a share of stock with it and then watch that compound and grow, instead of taking that $6.82 and ... well, what do you do with $6.82, really?

A friend of mine always thought I was being kind of silly, because it's just such a chore to do the bookkeeping for all of this. Which isn't a issue if you never plan to sell your stock but just to watch that nest egg build for 30 years, and then you can eventually take the dividends in cash and they'll be so lucrative you've live off of them in your retirement. Good luck with that, the cynics might say.

Over time, I've come to realize that my friend might have the better part of the argument. Or maybe not. Let's just say it's not a clear call.

There are two problems with my approach. The first is that you sometimes don't have a choice what delightful extra added stock you might find yourself sitting on. A company called CPC that made everything from high fructose corn syrup to Skippy to Entenmann's spins off its corn refining business, and suddenly I'm stuck with two shares of Corn Products Inc. that aren't even worth selling. And this just happened again, with Time Warner and AOL going their separate ways right after Time Warner spun off Time Warner Cable and now I'm the proud owner of a few shares of AOL stock. Well, I love AOL. But do I really need shares of it that I can't ever realistically sell? And when these spin-offs change the cost basis of the shares of stock, and you have to calculate that change over 68 little stock purchases over 17 years...

And then there are the situations when your stock is sold whether you want it to be or not. There's a merger or a buyout or something, and that stock you planned to own forever is suddenly not yours any more, but the privilege of tallying up the capital gain or loss from 68 little stock purchases over 17 years is very much yours to enjoy.

I'll take a moment here to rant about the practice of companies and brokerages not to provide fractional shares of stock when you transfer them from place to place or if a spin-off transaction leaves you with .6541 shares of AOL. In the current world, there aren't actual stock certificates any more, so it isn't like a fractional share of stock has to be liquidated and cashed out on your behalf because the alternative is to give me .6541 of a stock certificate. It's a fractional share, but it's just a number on a computer. The computers deal with fractional shares all the time, because there are dividend reinvestment programs and employee stock purchase programs and other things like that which generate fractional shares which the companies are all happily keeping on their books. But heaven forbid they just electronically transfer that fraction of a share. No sir. Here's your check for $16.82 for .6541 fractional shares of stock from that .8972-for-1 merger exchange rate. And now you own the right of figuring out that this $16.82 reflects purchases of .7398 shares of the pre-merger company from 3.42 dividend reinvestments. Some of those problems would exist even if you had only whole shares of stock, but they are exacerbated when you have fractional shares purchased in little tiny increments.

It was very depressing recently to realize that I'd been happily investing dividends in one company for 15 years, and when the company fire-sold in late 2008, the entire value of all of those 15 years of reinvestments was pretty much what I'd reinvested, as if I'd taken a dividend check from 1993 and tucked it under my pillow for 15 years. And I have to consider myself lucky to have gotten that much.

And yet, I'm still not sure the wise course of action is just to take some nice $6.82 checks to the bank every three months. In the case of a Corn Products, the dividends aren't even $1. Is it any more of a bother to account for those as a reinvestment than to have to deal with depositing a check for that amount, or even to dealing with a $1 sweep from the brokerage to a checking account? Maybe in 25 years I'll actually own barely enough stock to justify selling it.

1 comment:

Andrew said...

I've always been a big fan of dividend reinvestments, too. In my case, I have the vast majority of my reinvestments in IRAs and my 401k, which are tax sheltered and don't require me to figure out all the cost basis math.

In my brokerage account I focus on capital gains and covered call writing. This strategy works for me because I get the income potential from writing calls while focusing on positions that offer me potential for long term capital gains. The income from the calls is generally funneled back into shares of stock when I earn enough to buy a round lot. This makes it far easier for my accountant if there are any corporate actions.

Just a thought... might be something to look into.