BI > MAY 2003

A Focus on Dividends and Keeping Good Records

Moving From Shoebox to Computer

Editor's note: Our thanks to Nancy Danko, managing editor of NAIC's online publication, for this reminder of how important good record keeping can be to successful investing and how helpful software programs can be in taking record keeping out of the shoebox and putting it into the computer.

In early March President Bush unveiled a $670 billion economic and job growth plan centered mainly on tax cuts. The centerpiece of his plan calls for the elimination of taxes on dividends paid by investors. If this comes to pass, will it become an accounting nightmare for you? Or have you done your homework by keeping good records?

I sat down recently with Matt Willms, president of QUANT IX SOFTWARE, Inc., Mequon, Wis., to discuss how important record keeping is to successful investing. Since 1985 Willms' company has provided investors with extensive computerized tracking tools to improve investment portfolio decisions. Currently, investors use the company's leading software product, the NAIC Portfolio Record Keeper (PRK), to collectively track nearly $1.9 billion in assets.

"Many investors fail to realize the importance of proper record keeping," Willms says. "Think about your investment thought process. First you spend time researching stocks looking for potential buy candidates. Then you do your Stock Selection Guide (SSG) and decide if you have a good company at a good price, and one that could fit in your portfolio. But is this the end of your investment process? Of course not. In a real sense, it's just the beginning. You need tools to keep track of all your investment decisions. You need a way to record and process all your broker statements, dividend payments and other investment records. Where will they all end up? In a shoebox? Or a messy file drawer? Perhaps in your income tax file or just a brown paper bag stuffed in your closet?"

The SSG Begins the Investment Process

"I see the SSG as the beginning of the investment process, not the end," Willms adds. "You need an accounting program to keep track of your stocks. Just as folks take time to fertilize their lawns, or change the oil in their cars, it's just as important to take time to maintain their portfolio records. Doing so can lead to better investing results."

Dividends have always been important to investors and a significant part of the total return many experience on their investments. President Bush's proposed tax policy makes paying dividends even more attractive. "I expect we'll see more companies beginning to pay dividends if the tax cut policy passes," Willms says. Microsoft Corporation recently announced its first cash dividend.

"Phil Keating (Computer Group honorary chairman) often lectures at NAIC national events about weeding and feeding your portfolio, but you can't even make it to that point without proper record keeping. We tell our PRK customers that they can't reach their investment goals unless they know where they are and where they have been."

Willms makes a good case for how record keeping can lead to better investment decisions. "With software like the PRK program, you can visually see how your portfolio is constructed (Figure 1). You can review your portfolio's stock diversification by industry sector, by company or size. You might question, for example, why you have more than a quarter of your portfolio in the information technology sector and another quarter in financial stocks. That in turn could prompt more research efforts in other areas and SSG studies of companies in other sectors of the economy."

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Figure 1.

Dealing With Taxes and DRIPs

Record-keeping software can also help get records organized for taxes and the selling of securities, especially when multiple purchases are made or dividend reinvestment plans are used.

NAIC investors are big supporters of dividend reinvesting. That's because this approach, in which cash dividends are reinvested back into the company to buy more shares, follows one of NAIC's basic principles for long-term investing success -- reinvest those dividends, don't spend them. Unfortunately, many investors hesitate to enroll in reinvestment plans because of the record keeping requirements that usually involve quarterly statements, fractional shares and small dollar amounts. Shoeboxes fill up quickly.

"Don't stay away," Willms advises. "In today's depressed and volatile stock market, yields of 2 to 3 percent can play a big part in building those double-digit total returns NAIC investors are looking for over the long term. Use dividends to your benefit. Move from that shoebox to the computer."

Software offers investors detailed, accurate accounting for all their investments, including dividend reinvestment. Let's walk through an example with the PRK software to illustrate how simple that record keeping can be.

Let's assume you're a current shareholder of AFLAC and enrolled in its dividend reinvestment plan. You currently hold nearly 320 shares. On March 11, 2003, you receive a statement from AFLAC that details the income received and reinvested shares. To record this information, the first step is to enter the income details (Figure 2A): date (03/11/03) and dollar amount of income received ($19.17). Next, simply click the button labeled Reinvest Income to complete the reinvestment record.

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Figure 2A.

The net amount of these fractional shares (Figure 2B) is simply the amount of income that was reinvested ($19.17). The reinvestment price is automatically calculated. Now a simple click of the Save button completes the income/ reinvestment entry.

As a continuing shareholder of AFLAC, you can easily review all your data in a report titled Security Basis -- Tax Lot Detail for AFLAC (shown as Figure 3, see related files).

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Figure 2B.

This report lists all the key information regarding your AFLAC ownership -- quantity owned, cost paid, market value and unrealized gain or loss. When you visit the NAIC Web Site, check it out. It also serves as a good example of how dollar-cost-averaging can work to your benefit.

Nancy Danko served as "The BITS Lady," managing editor of BetterInvesting BITS from 1986 to 2003. She is a member of the Bellwether Investment Club.