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My question is about receiving dividends in a taxable account. When opening a new investment account, is it best to NOT reinvest the dividends automatically, but collect the dividends for a few months or for a year and then invest the total dividends into the stocks of my choosing? It seems that it will help track the cost basis easier.

The account will NOT have any tax advantages like a 401K or IRA, so if I sell something many, many years later; I will have an actual basis and not an estimate of cost basis for each stock or position I buy.

I am wanting to collect growing dividends to use as income for myself when needed, reinvest the collected income if I don't need it.

I know dividends from ETFs are not reinvested but if I buy dividend paying stocks or REITs in this same account, those dividends can be reinvested automatically.
Those who are already investing to collect a monthly or quarterly income, how do you handle the dividends?

I'll be starting in cash. Instead of the individual dividend aristocrat stocks, I'm thinking of starting with SDY and DLN, both are dividend ETFs. What other items should I consider in this portfolio for income? Preferably items that do NOT use a K-1 please.

Many thanks,
Carolyn
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Those who are already investing to collect a monthly or quarterly income, how do you handle the dividends?



just me --i don't re-invest dividends in any of my accounts.

but only because it seemed it would be a book-keeping headache


i wish i knew if there were tax advantage or better, investing advantage.
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My question is about receiving dividends in a taxable account. When opening a new investment account, is it best to NOT reinvest the dividends automatically, but collect the dividends for a few months or for a year and then invest the total dividends into the stocks of my choosing? It seems that it will help track the cost basis easier.

There's good news on the DRP basis front. You can now use average cost basis for shares acquired through a DRP after 2010:

http://www.irs.gov/irb/2010-47_IRB/ar08.html

Seems to me that choosing between automatic reinvestment and controlled investment of cash accumulated through dividends would be largely a question of which will cost less in fees.

You mentioned REITs. A caution here. They tend to throw off a lot of ordinary income that isn't qualified dividends. Remember that even if you're reinvesting the dividends are taxable income in the year received.

Phil
Rule Your Retirement Home Fool
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I am wanting to collect growing dividends to use as income for myself when needed, reinvest the collected income if I don't need it.
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Those who are already investing to collect a monthly or quarterly income, how do you handle the dividends?


It really depends on what you think your potential income needs from the dividends is going to be.

I have an account that I am using to generate income for a specific payment, so I don't reinvest those dividends - they go straight to a checking account at the broker where I hold the investments, and the payment is made from that account.

If I was not sure that I was going to need the income and wanted to reinvest at least some, I would probably determine what I thought my maximum potential income need from the dividends would be, collect that amount of dividends in the checking account, and then start reinvesting. I would look to re-load the checking account on a regular basis by stopping the reinvestment if I was using the money, otherwise I would just keep reinvesting.

Another way to split between cash and reinvestment would be to collect dividends from specific investments in the checking account and reinvest dividends from the rest of the investments, adjusting if the checking account was getting too big or too small, or as dividend payments changed.

AJ
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Do you want the dividends reinvested in the stock that generated the dividends? If you do, dividend reinvestment is often free. Unless you have a significant investment in a stock, the brokerage fee to buy additional stock would be a large percentage the dividends received. You need to be organized and keep statements of the purchases.

If you want to diversify, collect the dividends to make the purchase.

At least for my broker, reinvestment is selected on a per stock basis, and not on the entire account.
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How many dividend-paying ideas are you talking about?

If you are talking about less-than-10 names, your fears about it being complicated are overblown.
Three tools that can help

1. Start a spreadsheet.
One can make it fancy or complicated if one wants. I had eight columns to start but six
columns is all one really needs.
Purchase date, # of shares purchased, Cost, Sales date, # of shares sold, Sales. The "stocks"
that caused me to choose the spreadsheet solution were Canadian Royalty trusts (Canroys), many
of which paid their distributions on a monthly basis. One doesn't even have to update the
spreadsheet on a monthly basis. Even once every 3-6 months would work.

2. Brokerage statements
This might vary by brokerage but some brokerages have some really good transaction reporting
documents (either mailed or online). The brokerage where I do most of my DRIP investing has
really good 1099 tax reporting data for customers.

3. Using "various"
One does have to separate long term holdings/transactions from short term holdings/transactions.
But it is possible to consolidate a whole bunch of transactions involving the same
stock ticker into a single line (two lines if the transactions were spread over more
than a year). The spreadsheet mentioned in #1 is useful here.
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