Buying stock directly from a company, without using a stockbroker, can be fun and
rewarding. Take a look at the tips below if you think you might want to give direct
investing a try.
Buying stocks directly from
companies, without paying a broker, has become a popular way to invest.
But if you haven't balanced your checkbook since George
Bush was president, you probably shouldn't invest in dividend reinvestment plans (DRIPs)
or other kinds of direct-purchase stock plans.
One key to using direct-investment plans successfully is
keeping track of the financial statements you get in the mail. Organization is critical.
If you're up to the task, here are some tips for
do-it-yourselfers who aren't afraid of a little homework.
- If you're new to direct investing, resist the
temptation to buy a dozen stocks at once. You may find yourself buried under a pile of
financial statements. ''Start off with two or three, see how that goes, and as you get
more comfortable with the process, you can add more,'' says Charles Carlson, editor of DRIP
- Set up a record-keeping system that makes sense to you.
You'll need to file and keep track of statements that show the number of shares purchased
directly or by dividend reinvestment, the price per share and the date. Many direct
investors use financial software to record the information; others use ledgers. ''It can
be as simple as a legal pad, but nonetheless, you need to start from Day 1,'' says Stephen
Barnes, a financial planner in Phoenix.
- Cherish the year-end statement. Most companies provide a
year-end statement documenting all your transactions for the year. This will give you the
information you need to determine how much you owe the Internal Revenue Service, which
will tax your dividends even if you reinvest them. And when you sell some or all of your
shares, you'll need year-end statements to figure the original price you paid for shares
you're selling, known as the cost basis.
- If your records are already a mess, ask the
company's investor relations department for the name and phone number of the company's
transfer agent. The transfer agent handles purchases and sales of the stock and should
have a record of your transactions for at least two or three years, says James Volpe, vice
president of First Chicago Trust. First Chicago Trust is a unit of EquiServe, a transfer
agent for more than 1,400 companies.
- If you need records going back more than three years, you
may have to pay a fee, Volpe says. Make sure you're dealing with the right transfer agent.
It's not unusual for companies to change agents, so if you're looking for data that goes
back several years, you may have to make several calls. AT&T, for example, has changed
agents at least three times the past 10 years, Volpe says.
- Buy stocks you can live with for the long term. Holding
your shares at least a year will reduce capital gains taxes and simplify tax computations.
Under the new capital gains laws, capital gains on shares held at least 12 months are
taxed at 20%, while gains on shares held less than a year are taxed at your ordinary
income rate -- up to 39.6%. If you wait until your shares have passed the one-year mark
before you sell, you won't have to pay the higher rates and possibly wrestle with two
different tax rates.
- If possible, plan to sell all your shares in a particular
company at one time. That way, you can use the average cost basis of all the shares, the
easiest way to figure what you owe, Carlson says.
To calculate how much you owe using the average cost
basis, add up the amount you paid initially to buy shares, the amount of all dividends
that were reinvested and any additional fees or cash payments you made to buy shares over
the years. Subtract the grand total from the current market value of your account, and the
result is your capital gain.
If you forget to add in reinvested dividends, you'll
enrich the IRS at your expense. Assuming you're a good citizen, you've already paid taxes
on your dividends. Adding them back into your cost basis ensures that you're not taxed
- If you don't want to sell all your shares at once, there
are other ways to determine your cost basis. One is called ''first in, first out,'' or
FIFO. Using this method, you treat the first shares you bought as the first shares sold.
For example, if you bought 100 shares for $20 each and sold 100 shares three years later
for $30 a share, your taxable gain under FIFO would be $1,000. At a 20% capital gains
rate, you'd owe $200.
You also can use the ''specific identification'' method,
which lets you designate which shares you want to sell. The advantage: You can choose to
sell the shares you paid the most for, thus reducing your taxable gain. For example, say
you purchased 100 shares for $20 a share and 100 for $30 a share and now want to sell half
your shares for $40 each. You can specify you're selling the $30 shares, thus making your
taxable gain $1,000, vs. a gain of $2,000 if you use the FIFO method.
But remember: The IRS says once you pick a method for
calculating your cost basis in a particular stock, you must stick with that method for all
transactions in that stock.
One of the down sides to direct investing is the lack of
control over exactly when your shares are sold. Some companies require written
notification, for example.
And as John and Kristina Vinson learned, a couple of weeks
can make a difference. The Vinsons, small-business owners in San Jose, Calif., have used
direct-investment plans for about six years.
Four years ago, they decided to sell some shares to raise
money for a down payment on a home. Not long after they sent in their order, the stock
market went into a tailspin. The market came back -- after their shares had been sold.
Last summer, the Vinsons decided to sell some additional
shares. They mailed the company their sell order just before the Asian financial crisis
caused U.S. stocks to plunge.
''I think there were three bad days in the market in the
last 10 years, and we sold on two of them,'' Kristina says. But even with that bad luck,
the Vinsons came out ahead. ''We made a fair amount of money, so you won't hear me crying
too much,'' John says. ''But it could have been a lot better.''
Some investors have developed ways to control when their
shares are sold. Thaddeus Shura, 52, a college math professor in Lowellville, Ohio, owns
stock through 23 direct-investment plans. He likes to buy blocks of shares in beat-up
companies directly. But when he sells, he uses a discount broker. Here's how:
When Shura decides to sell, he asks the company to send
him his stock certificates. He then deposits the certificates in his brokerage account and
establishes a specific price at which he wants to sell, known as a limit order. ''Selling
through a DRIP is really inefficient,'' he says.
Figuring your capital gains
If you sell stock acquired through a dividend-reinvestment
plan, you must know what each share cost to be able to figure your capital gains and
losses. And you can't do that unless you have kept the annual statements from the company
that summarize all your transactions for the year.
Look at this greatly simplified example:
You start by buying 10 shares of XYZ on Jan. 15, 1997, for
$100, or $10 a share. Then, dividends were reinvested in additional stock as follows:
$10 on March 31 buys 1 additional share.
$15 on June 30 buys 1 additional share.
$25 on Sept. 30 buys 2 additional shares.
If you sell all 14 shares for $15 a share, your gain would
be $60 ($210 proceeds from the sale, minus $150, which is what you paid to buy the
Any fees you paid to reinvest dividends can be added to
your cost of the shares to reduce your capital gain.
The calculations get more complicated if you sell only
part of your shares, rather than all, and when your reinvested dividends buy less than a
whole share, which is very likely.
If you don't have good records to prove otherwise, the IRS
can assume that you are selling your oldest shares first, which usually results in the
biggest capital gain.
Sources: The Ernst & Young Tax Guide 1999; USA TODAY
Where to get help with direct investing
Some places to go for more information about direct
Direct Purchase Plan Clearinghouse, http://www.enrolldirect.com, 1-800-774-4117.
Investors can request information and enrollment applications for companies that sell
their stock directly to the public.
DirectInvestor, http://www.netstockdirect.com. Offers a list of
companies with direct-investment plans. Updated daily.
DRIP Investor, http://www.dripinvestor.com, 219-852-3220. $59 a
year for monthly newsletter and directory of DRIPs.
National Association of Investors Corp., http://www.better-investing.com, 877-275-6242.
NAIC's Low Cost Investment Plan allows investment clubs and individuals to enroll in
companies' dividend investment plans for a small service charge. NAIC's Web site provides
information on enrolling in the plan and offers a list of participating companies.
The Moneypaper, http://www.moneypaper.com,
1-800-388-9993. $81 a year for monthly newsletter on DRIPs and direct-purchase plans.
Reduced rate of $40.50 for first-time subscribers who enroll through the Web site.
Subscription includes Guide to Dividend Reinvestment Plans.
Motley Fool, http://www.fool.com.
Tips on investing in DRIPs and no-load stocks. Includes chart comparing costs of programs
for DRIP investors.
Source: USA Today By Sandra Block Feb. 19,