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Beware Dividend Reinvestment When Selling Stocks

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It’s probably no surprise that in the last year I’ve been buying some blue chip companies with a solid history of dividends. Dividend investing is one of those long term investing strategies that has, for the most part, fallen out of favor after the fantastic dot-com craze, crash, and subsequent bull market that saw the Dow at 14,000 before it crashed to the mid-6000s in the depths of the economic panic. Throughout that time the Dividend Aristocrats, stocks that have paid and raised their dividend in 25 consecutive years, and the Dividend Champions, stocks that have paid a constant or rising dividend for 50 years, have maintained their dividend like clockwork.

Through dividend increases, many a billionaire’s fortune have been built (Warren Buffet’s annual dividend from his shares of Washington Post and Coca Cola exceed his investment).

I’ve purchased several dividend yield stocks with the purpose of building a nice dividend portfolio. One of the risks of doing so is that the underlying stock’s prospects could change and they could go from a nice stable stock, with a nice dividend yield, to a scary stock with a grim future, with a nice dividend yield. A prime case is that of BP, which at the time I owned them was offering a healthy 6% yield. If BP had not cut its dividend for the rest of the year, it would’ve paid out a 12% yield on its dividend.

What happens if you own a dividend stock through the ex-dividend date but sell it before the payout? You still receive the dividend, since you are the shareholder on record as of the official date.

What happens if you have your broker automatically reinvest your dividends? At TradeKing, and most other brokers, you will still receive shares of stock even though you no longer own the shares that gave you the dividend. This is expected because at ex-dividend, that’s what you elected. Unfortunately, there’s no automatic check as to whether you own the original stake (is it technically correct to call it reinvestment if you liquidated the original?) and, as it turns out, there’s no way to change it with 100% certainty.

I contacted TradeKing to try to get it changed and they said they would put forth a “best effort” but there is no guarantee I’ll receive cash instead of shares. The clearing firm has already been notified to reinvest the shares, which is why they can’t say for sure what will happen. In other words, they will try but no guarantees. With so much time between now and the payout date, I’m hoping I can get cash instead of shares and avoid paying $4.95 to liquidate them.

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6 Responses to “Beware Dividend Reinvestment When Selling Stocks”

  1. DIY Investor says:

    Did you check “sell all” when you sold? That will usually clear it out. Also, my experience is that if you ask your broker to sell small number of shares they will usually do it for no commission.

  2. Split Cents says:

    Interesting problem! But there is an easy solution to get you cash instead of stock: sell on the in-dividend date (the day before the ex-dividend date, and the last day that sellers will receive the coming distribution). At that point, the share prices will have increased accounting for the coming distribution (assuming you the stock price isn’t plunging for other reasons)!

    A more detailed explanation over @ http://www.splitcents.com/2010/selling-stocks-and-avoiding-dividend-reinvestment/

  3. cubiclegeoff says:

    Not sure how tradeking works, but you could change your “reinvest” option around the date that the dividend is due and get cash. Although this could affect dividends from other companies that are on the same date.

  4. Joe says:

    Can anyone actually tell me what “blue chips” means? I’ve heard that term in everyting from finance to sports and I still don’t really understand it.


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