Entering stock purchased with cash balance from dividends

Cindyc

Hi- I have not been active in these discussions for a long time...

If I purchased stock from a cash balance in my investment account, do I record that as "Bought" OR "ReinDiv" since the cash used was from dividends. I wasn't sure if the "Reinvestment of Dividend" should only be used when the new stock was immediately investing in more stock from that particular stock and never went to "cash balance"? I was letting all dividends from various stock in that account go to the cash balance and then purchasing more of one of my existing stocks. Not sure which way I should enter the transaction. Thank you!

Rocket J Squirrel

I think you have this intuitively figured out. Buying a security from your cash balance is indeed a Bought transaction. ReinvDiv is used when the cash goes straight to the purchase and so doesn't affect your cash balance.

The difference is that a Bought transaction will increase your Amount Invested and a ReinvDiv will not. So they affect your investing statistics a little differently.

Chris_QPW

You would use buy/bought.  "Reinvest - Income Reinvested (with filling in the dividend fields)" is for when you have told the financial institution to reinvest the dividends.  The result is that with "Reinvest - Income Reinvested" the cash balance isn't changed, because the "cash" comes from the dividend directly.

Chris_QPW

@Cindyc yes, you have it correct.

Chris_QPW

I think @Tom Young's example is missing one thing that makes it clear what is happening.

You get a dividend, if you don't reinvest it the transactions downloaded are:

1. Dividend transaction that Quicken both records the dividend to report on later and puts the cash into the register.
2. Buy transaction.  You get shares, your cost basis in the security goes up, and the cash balance goes down.

If you reinvest the dividend:

1. You get a reinvest dividend transaction.  Quicken records the dividend, and then buys more shares with the cash.

The only real difference is that reinvest dividend does it all on one transaction and your buy/cost basis is at that time instead of at a later date.

Rocket J Squirrel

I think you have this intuitively figured out. Buying a security from your cash balance is indeed a Bought transaction. ReinvDiv is used when the cash goes straight to the purchase and so doesn't affect your cash balance.

The difference is that a Bought transaction will increase your Amount Invested and a ReinvDiv will not. So they affect your investing statistics a little differently.

Chris_QPW

You would use buy/bought.  "Reinvest - Income Reinvested (with filling in the dividend fields)" is for when you have told the financial institution to reinvest the dividends.  The result is that with "Reinvest - Income Reinvested" the cash balance isn't changed, because the "cash" comes from the dividend directly.

Tom Young

The really big difference is that a Bought is accounted for as this balanced entry:

Debit (increase) Cost Basis of Security bought    $XXX
Credit (decrease) Cash in Investment Account    $XXX

while a ReinvDiv makes this balanced entry:

Debit (increase) Cost Basis of Security bought    $XXX
Credit (increase) Dividend Income                      $XXX

So if the cash accumulated in the Account as DivInc then you'd use the first entry.  If the cash accumulated in the Account with no DivInc Category associated with it, then you'd use the second entry.

Cindyc

I appreciate your response, but I'm not good with accounting, so I couldn't fully understand your answer with the debits and credits.

I think that Reinvest Dividends can only be used when a dividend is earned by "Stock X" and when it's paid out by the company, it doesn't go to the cash balance, but is immediately reinvested in more shares of "Stock X". The other scenario is when a stock is not set up to automatically reinvest and the dividend goes to the cash balance which is accumulating cash from dividends from a variety of other stocks in the account. Then, when any stock purchased with the cash balance needs to entered as "Bought". Do I have the correct? Thanks again!

Chris_QPW

@Cindyc yes, you have it correct.

Cindyc

I'm trying to track as accurately as possible all of my finances in Quicken. What would happen when I would actually sell some stock that I recorded incorrectly in Quicken? Will the brokerage company still record my transaction correctly since they have the history of the cost-basis, etc? The brokerage firm will know what my actual profit or loss is on the sale of the stock even though I may have entered something incorrectly in Quicken, correct?

Chris_QPW

I think @Tom Young's example is missing one thing that makes it clear what is happening.

You get a dividend, if you don't reinvest it the transactions downloaded are:

1. Dividend transaction that Quicken both records the dividend to report on later and puts the cash into the register.
2. Buy transaction.  You get shares, your cost basis in the security goes up, and the cash balance goes down.

If you reinvest the dividend:

1. You get a reinvest dividend transaction.  Quicken records the dividend, and then buys more shares with the cash.

The only real difference is that reinvest dividend does it all on one transaction and your buy/cost basis is at that time instead of at a later date.

q_lurker

@Cindyc. The answer to your follow up questions is a bit “That depends.”  

If it is a personal investment account and the stock shares were bought ‘long’ ago (like 2010 or earlier) the brokerage is not required to keep and report the purchase information; it it the investor’s responsibility to report the correct data. Those are known as non-covered shares. The cutoff date varies a bit with the specific type of security.  More recent purchases, you can rely more on the brokerage. 

If this is a retirement account (401k or IRA), the details and your errors are less likely to be any problem.  You can likely be more reliant on brokerage info, at least tax-wise. 

But I still encourage you to keep records as accurately as possible to cross check the broker’s info and independently identify how well you investments are doing. 

Tom Young

Cindyc said:

I appreciate your response, but I'm not good with accounting, so I couldn't fully understand your answer with the debits and credits.

I think that Reinvest Dividends can only be used when a dividend is earned by "Stock X" and when it's paid out by the company, it doesn't go to the cash balance, but is immediately reinvested in more shares of "Stock X". The other scenario is when a stock is not set up to automatically reinvest and the dividend goes to the cash balance which is accumulating cash from dividends from a variety of other stocks in the account. Then, when any stock purchased with the cash balance needs to entered as "Bought". Do I have the correct? Thanks again!

Yes, you have it correct.  In that second scenario where the dividend cash simply accumulated in the Account, if you used the Reinvest Dividend action to buy more of the stock, the new stock would have the correct number of share and correct basis, but you'd double count your dividend income!

Tom Young

Chris_QPW said:

I think @Tom Young's example is missing one thing that makes it clear what is happening.

You get a dividend, if you don't reinvest it the transactions downloaded are:

1. Dividend transaction that Quicken both records the dividend to report on later and puts the cash into the register.
2. Buy transaction.  You get shares, your cost basis in the security goes up, and the cash balance goes down.

If you reinvest the dividend:

1. You get a reinvest dividend transaction.  Quicken records the dividend, and then buys more shares with the cash.

The only real difference is that reinvest dividend does it all on one transaction and your buy/cost basis is at that time instead of at a later date.

In the real world, securities where you've elected to reinvest dividends can show up either way in your downloads, it depends on the broker and the security.  So some of my dividends to be reinvested show up as a Div one day and a Bought the next day while others show up as one comprehensive RenivDiv transaction. Either approach gives you the same results. 

I was trying to point out - perhaps not as clearly as I might have - that using a ReinvDiv transaction for cash accumulated via several properly accounted for earlier dividends - would give you the correct answer as to your security holdings, but would end up double-counting your dividend income.

Chris_QPW

@Tom Young Yes, and they can even get the transaction(s) wrong.  My wife's 401K sends a bought transaction when it should be a reinvest (no dividend, which is wrong, it should be either a dividend and a buy or a reinvest), so I have to change it every month.