Dividend Reinvestment

[Mickey]

Hi,

I'd appreciate some assistance with understanding how dividend reinvestment affects total cost.

Example
If I purchased 1000 ABC shares at $10.00 each with a brokerage fee of $100 - my total cost would be $10,100.

Let's say I received a dividend of 20c per share (ignore tax to keep it simple) and received a payment of $200.00

Assume the ABC share price is still $10.00 per share and I purchased 20 more ABC shares with the $200 from my dividend, thereby increasing my ABC holding to 1020. Let's say the brokerage fee was $20.00.

Does this mean that my new total cost for ABC is calculated as $10,100 (Initial Purchase) - $200 (Div) + $20 (Brokerage) = $9,920 and therefore my average share price for ABC is $9,920/1020 = $9.725?

Many thanks
Mickey

[Snow Leopard]

There is taking the cash you receive for your dividends and using that cash to buy further shares in the same company through on market purchases - this is what you are describing.

There is also being paid your dividend in new shares in the company - this is generally known as a dividend reinvestment plan.

Anyway on the assumption that you knew that difference I would answer your question by saying No - not usually.

The cost of your 1020 shares is $10320 ($10100 + $220).

Best Wishes
Paper Tiger

[Mickey]

Thanks PT - I thought that'd be the case. Yeah, I'd be spitting tacks if the brokerage rates I used in my example weren't fictitious :-)

So does that mean then for the other scenario - DRP - that I would have to adjust my spreadsheet for a particular share to increase the total cost by the value that the reinvested shares were struck at?

[Snow Leopard]

I have to admit that despite my many years of share ownership I have never yet taken part in a DRIP, but as luck would have it, I have recently signed up for the DRIP in Heartland.

But come the time, Yes, I will record, as the price paid for these new shares, the specified strike price.1 2

Come the 5th April - I will be better informed.

Best Wishes
Paper Tiger

1 Though I do wonder about how to deal with the discrepancy where your dividend entitles you to say 99.467 shares and you only get 99.

2 Sorry - A little heavy on the commas there.