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I have several different accounts at Fidelity (regular taxable, 401k, Roth IRA, HSA). With the exception of the few mutual funds I have, almost everything is set for dividends and capital gains to be deposited to the core account (i.e. money market or similar). I can change this to reinvest in security. I am thinking this sounds like a good idea so I won't have to do a trade whenever enough much money accumulates that I don't want it sitting around with low return. However, I have a few questions. First, do you get charged a commission or other fee for reinvesting? Second, why would capital gains and dividends be grouped together? Doesn't this mean if I sell the stock, the profit will be used to buy that stock right back? Lastly, there are two additional checkbox options I was hoping somebody could explain: "All equity positions currently held in this account" and "Future equity purchases, transfers, and deposits to this account". Both of these seem to suggest to me that potentially a large amount of money would be used to purchase shares of a particular stock without my confirmation; in the former case all of the current cash and in the latter case any cash I deposit in the future. If this is indeed the case, wouldn't these options only make sense for one particular stock?

FOLLOW-UP: Looking around, some people suggest not doing this for taxable accounts because it complicates cost basis reporting. Is this a valid concern? Doesn't the brokerage handle that and send you the information when you sell the stock?

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4 Answers

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First, do you get charged a commission or other fee for reinvesting? Second, why would capital gains and dividends be grouped together?

If the broker charges you for that run away. As Joe explained, it is done as a courtesy.

Doesn't this mean if I sell the stock, the profit will be used to buy that stock right back?

No, this is only the capital gains distributions of funds.

Lastly, there are two additional checkbox options I was hoping somebody could explain: "All equity positions currently held in this account" and "Future equity purchases, transfers, and deposits to this account".

"All equity positions" means your selection will be valid for all the positions you already have. "Future positions" means it will only affect future positions, not the ones you already have.

For example:

You have 100 shares of X, 100 of Y, and you make the selection.
 Then tomorrow you buy 100 of Z.

End of the month: X, Y and Z all give $10 dividend each.

The result:

If you selected "Future", only the $10 dividend given by Z will be reinvested,
and you'll have a new position with cost basis of $10, amount of shares
per the market price at that time.

If you selected "All" - you'll have 3 new positions, each value of $10, with
the respective amounts of shares for X, Y and Z per the market price of that time.

FOLLOW-UP: Looking around, some people suggest not doing this for taxable accounts because it complicates cost basis reporting. Is this a valid concern? Doesn't the brokerage handle that and send you the information when you sell the stock?

Yes, because you end up with tons of positions and you need to track the cost basis for each. Brokers are required to report cost-basis on 1099-B now, so its less of a problem, but before 2011 you'd have 10's of positions each year (if you have a monthly dividend, for example) each with different cost basis, and you'd usually sell them all at once. Go figure the gain. So the new 1099-B reporting regulations help a little on this, but it only kicks in for everything starting of 2013 IIRC. Fortunately, for some investments (mutual funds, mainly) you may chose averaging, but it has drawbacks as well.

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In addition to a brokerage charging a fee for reinvesting mutual fund distributions into the same fund, if one is investing in a load fund, make sure that the fund does not charge the load on re-investments of distributions (many, possibly most, don't). If the fund waives the fee for re-investments, there will be a difference between taking the distribution, putting it in a money market fund, and then perhaps later investing the money back into the load fund (thus incurring the load), and just asking the fund to re-invest all distributions into the fund. –  Dilip Sarwate Jan 23 '13 at 13:21
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No, the reinvestment is done as a courtesy. Consider, one can have, say, 100 shares of a $50 stock. A 2% dividend is $100/yr or $25/quarter. It would be a pretty bad deal if brokers charged you even $5 for that trade.

When cap gains and dividends are grouped as you suggest, it refers to Mutual Funds. My funds will have a year end dividend and cap gain distribution. In a non-retirement account, one has to pay the tax due, and be sure to add this to your cost basis, as it's money you are effectively adding to your account. It does not mean cap gain the same as when you sell your shares of Apple for a huge gain.

Those check boxes seem to offer you a chance to put all your holding on the same reinvestment plan for div/cap gain. You should also be able to choose one by one what you'd like to do.

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I'd like to add that many companies offer Divident Re-Investment Plans or DRIPs, which is basically a regular automatic stock purchase program. More info here: http://en.wikipedia.org/wiki/Dividend_reinvestment_plan.

While your stock broker may offer dividend reinvestment, this is not the same as a DRIP. DRIPs are offered directly by the company, rather than the stock broker. They have the added benefits that the stock purchases are almost always commission-free, and in some cases, the company even offers a discount on the stock price.

It can take a little more effort to get enrolled in a DRIP, but if you are interested in holding the stock long-term, this is a good option to consider.

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This helps a lot. I wasn't clear on the difference between DRIPs and brokerage systems for dividend reinvestment. How do you figure out what stocks offer DRIPs and how do you get enrolled? –  Craig W Jan 24 '13 at 3:12
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I have found The DRiP Investing Resource Center to be a useful resource for more information about DRIP investing.

Moneypaper.com offers a list of companies offering both direct purchase options and dividend reinvestment plans. For those offering dividend reinvestment plans, but not direct purchase, you have the option of using a service to purchase your first shares to enroll in the DRIP program.

The tax paperwork for DRIPs is a pain due to the partial shares purchased over time when you have to figure out your own cost basis upon sale of shares , but a spreadsheet and a FIFO (first in first out) approach makes it not too much of a headache.

-MU

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