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Beware Dividend Reinvestment When Selling Stocks

Posted By Jim On 07/14/2010 @ 7:30 am In Investing | 6 Comments

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 [3], stocks that have paid and raised their dividend in 25 consecutive years, and the Dividend Champions [4], 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 [5] have been built (Warren Buffet’s annual dividend from his shares of Washington Post and Coca Cola exceed his investment [6]).

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 [7], 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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[2] Email: mailto:?subject=http://www.bargaineering.com/articles/beware-dividend-reinvestment-when-selling-stocks.html

[3] Dividend Aristocrats: http://www.bargaineering.com/articles/dividend-aristocrats.html

[4] Dividend Champions: http://www.bargaineering.com/articles/dividend-champions.html

[5] billionaire’s fortune: http://www.bargaineering.com/articles/billionaire-secret-avoid-ordinary-income-acquire-capital-gains.html

[6] Warren Buffet’s annual dividend from his shares of Washington Post and Coca Cola exceed his investment: http://www.dividendgrowthinvestor.com/2010/01/buffett-dividend-investor.html

[7] BP: http://www.google.com/finance?q=BP

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