AboutJay Kay Expertise As a private investor for the past 40 years, I have experienced both bull and bear markets, and have lived to tell the tale. I should be able to provide you with serious, practical insights into managing stocks, bonds and mutual funds in your portfolio, along with useful information concerning most aspects of personal finance. No specific stock/bond recommendations furnished.
Question Hello, I have a question about stock dividends. For my birthday I received a share (1) of IBM stock, mostly so I could hang the certificate on my wall, and the other day I received my first dividend check of fifty cents. I contacted the company and asked how to make it direct deposit so I wouldn't have to cash a fifty cent check every few months. They responded on how to do it however, they also said that I could have them reinvest my dividends. According to my math, assuming IBM shares stay at the price they are now, it would take me about sixty years to have invested enough to buy a second share. My question is should I put the fifty cents in the bank or reinvest it? The reason I ask is because I heard that with some companies you can buy into part of a single share. Such as how Berkshire Hathaway shares are worth over a hundred thousand each, I was told that several people can own a single share, is this true? I hope my question makes sense and thank you for any information you can provide.
Answer While I admittedly am not familiar the details of IBM's dividend reinvestment policy, it is likely that automatic dividend reinvestment can (and will) result in your owning fractional shares above and beyond the single share you own now. This would result in future dividends being slightly higher than the dividend for a single share...and so forth. Should you continue to take the dividend in cash, your account would continue to have a single share, and the subsequent dividend payments would never be more than the amount declared for one share.
I doubt if you can purchase a partial (i.e., fractional) share on your own. Berkshire Hathaway is an exception, because of the price. So, if you like the idea of owning stock in IBM, why not have the company automatically reinvest the dividends in additional (fractional) shares. Just make sure there is no charge for this. Also, bear in mind that for income tax purposes, the cost of your original share must be adjusted to reflect additional purchases of the company's shares when the stock is sold. It's probably more of a bother than you want to deal with. If so, let them send you the dividend payment, deposit it in the bank and forget the rest (except reporting annual dividend payments on your tax return). Get it?
