12-14-2013, 03:22 PM
For sure you need to think about reinvested dividends, automatic or not, as new monies. When it is automatically reinvested you may not touch it but it is money that you could have put elsewhere and it is also income that you pay taxes on so count it as capital in.
This area is a fuzzy one to some as you often see people talk about YOC, yield on cost, and many that talk about their numbers of "....my YOC is 12% on the stock I bought 10 years ago..." Much more often than not the YOCers are not counting automatically reinvested dividends as new capital in so their YOC is over inflated. The people that do this poor calculation do everything that they can to justify it but it is meaningless. Since the IRS wouldn't look at it like that, your broker statements won't look at it like that, or if you were a business you can't use funny math like that, we shouldn't either.
Distorting results by not counting new monies, regardless of the source, does not allow you to think clearly. You could end up holding a stock much longer than you should, especially if you had it for years. Say if you invest $1,000 today and twenty years from now $6,750 (10% compounded per year). I you ignore dividends you might think that if you sold it during a drop at $4,000 that you made $3,000 when in reality if the stock was a dividend payer you made much less money since the reinvested dividends would have been worth around 50% of the share total that you owned after those 20 years of reinvesting.
Had you considered your dividends as capital in your consideration to sell may have come much sooner than later (assuming it is the company itself that is down for whatever reason and not the market as a whole).
This area is a fuzzy one to some as you often see people talk about YOC, yield on cost, and many that talk about their numbers of "....my YOC is 12% on the stock I bought 10 years ago..." Much more often than not the YOCers are not counting automatically reinvested dividends as new capital in so their YOC is over inflated. The people that do this poor calculation do everything that they can to justify it but it is meaningless. Since the IRS wouldn't look at it like that, your broker statements won't look at it like that, or if you were a business you can't use funny math like that, we shouldn't either.
Distorting results by not counting new monies, regardless of the source, does not allow you to think clearly. You could end up holding a stock much longer than you should, especially if you had it for years. Say if you invest $1,000 today and twenty years from now $6,750 (10% compounded per year). I you ignore dividends you might think that if you sold it during a drop at $4,000 that you made $3,000 when in reality if the stock was a dividend payer you made much less money since the reinvested dividends would have been worth around 50% of the share total that you owned after those 20 years of reinvesting.
Had you considered your dividends as capital in your consideration to sell may have come much sooner than later (assuming it is the company itself that is down for whatever reason and not the market as a whole).
