Originally Posted by hoangtu69
How about individual stocks? Do the above formulas still apply?
For example. I have a stock that pays $100 per quarter in dividends. If I use that $100 and buy more shares of the same stock, how does this affect my cost basis?
Correct. You need to determine the initial amount of money invested. For example, if you invested $5K for Stock XYZ, the cost basis is $5K. Cost basis can also be measured per share. If you bought 100 shares of Stock XYZ for $5K, then the cost basis per share is $50. So, remember that dividends are the portion of the profits a company pays out to you , as an investor (shareholder). Theoretically, the share price will drop by the amount of the dividend upon payment since that amount of cash has just been removed from the balance sheet. Dividends then are investment returns in the form of a cash payment. In contrast, when a company retains its earnings and foregoes paying dividends, the investment returns will presumably be in the form of an increasing share price (at least that's what its investors are counting on). Dividend reinvesting does affect the cost basis of your holdings, but it shouldn't be seen as a kind of partial refund of your original purchase. If you invest $10K in a dividend paying stock that generates $300 in dividends after one year (a 3% yield), just because you reinvest that income doesn't mean that your cost basis has been reduced to $9.7K. Reinvested dividends should be seen as a new purchase of stock. An example: you purchase 1K shares of XYZ for $25K. Your cost basis is $25/share. Let's suppose the stock pays a quarterly dividend of $0.31/share (equating to a quarterly payout of $310). Let's also assume that the stock rises by the time of the next dividend payout so that it's trading at $31/share when your dividends are reinvested. Your dividend payout is enough for you to acquire an 10 additional shares,$31*10=$310, purchased at $31/share. Reinvesting dividends is a powerful approach for compounding both total portfolio value and cash flow over the long term. Dividend reinvestment, combined with dividend growth and maintaining a portfolio of high quality companies, is a long term recipe for investment success.