2012-01-05 / The Motley Fool

Ask the Fool

Back to Basis

QWhen selling a stock, how do I determine my cost basis and my gain?

—D.Y.,San Ramon, Calif. AImagine that you buy 100 shares of

Sisyphus Transport Corp. (ticker: UPDWN) for $40 each, paying a $15 commission. Your cost basis is the purchase price ($4,000) plus the commission, or $4,015. The basis per share is $4,015 divided by 100, or $40.15.

If you eventually sell the shares for $50 each, or $5,000, subtract the $15 commission and your proceeds will be $4,985, or $49.85 per share. Your taxable capital gain will be the difference — $970, or $9.70 per share. QHow do companies decide how much to pay out in dividends?

— R.B., Topeka, Kan. AIt depends on how management thinks it can best use the firm’s profits. The money might be used to pay down debt, to buy another company, to build more factories, hire more workers or buy more advertising, among other options. Such uses can reward shareholders even more than dividends would, by making the company more valuable. Still, managements often opt to pay out a portion of earnings in dividends, especially when they don’t see more compelling alternatives.

(Young or rapidly growing companies often don’t pay dividends, preferring to spend all extra cash fueling growth.)

Dividend amounts tend to stay put for months or years. Healthy, growing companies will usually up their dividends periodically. Caterpillar, for example, has hiked its dividend by an annual average of 10 percent over the past decade.

If you’re looking for promising dividend paying investments, take advantage of a free 30-day trial of our “Motley Fool Income Investor” newsletter (www.incomeinvestor.fool.com) and you’ll be able to see our long list of recommendations. ¦

Got a question for the Fool? Send it in — see Write to Us.

Return to top