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Is there a sleeping problem attached to the power of dividend reinvestments, and what approaches can we use to ease the pain of future capital gains?
I started small investing small amounts in quality shares, some 20 years ago, and took advantage of the benefits offered by dividend reinvestment. It felt good growing my portfolio and adding extra shares at a lower cost and watching the portfolio value compound over time.
I am now retired, and using the income from my portfolio to supplement my living costs. I am also at the point where I would benefit from re balancing my portfolio, because of an over strong bias in some investment categories.
In order to re balance, I would need to sell some share parcels, purchased up to twenty years previously. Using WOW as an example, my average entry price has been $10, and CBA is $16. This is a powerful testimony to the benefits of compounding, but any re balancing of holdings means a harvest of a pro-rata capital gains.
I also know that at some stage I will exit this world and wonder if I do nothing, am I passing a capital gains memento onto the benefactors of my estate?
I know no one ever went broke taking a profit, but I feel if not handled with care, there may be a dark side to dividend reinvestment and the power of compounding.
Do you have any suggestions to help brighten the potential dark side of dividend reinvestment?
A: Thanks for the question.
As you remarked, no one ever went broke taking a profit.
Most people in the community wouldn’t agree with you about a “dark side” – although I do understand what you are saying.
The only practical suggestions I have are:
a) If you sell some of your WOW or CBA shares, you can potentially offset the gains by crystallizing losses on other shares. If you really want to own these other shares, just buy them back on market in a separate transaction; or
b) Leave the problem to your benefactors. As they are post 87 assets, your estate or beneficiaries will inherit your cost base.
Of course, if the shares are held in your super fund, then the problem will go away when you start to take a pension and the tax rate drops to 0%.
