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Show STOCK ACQUISITION PROGRAMS Over the years a valuable source of corporate funding has been through the vehicle of shareholder dividend reinvestment plans. At present, more than 1,000 U.S. companies offer such programs (DRPs). Under a DRP a company does not pay out a cash dividend divi-dend to a stockholder but will use the available dividend to purchase additional addi-tional full and fractional shares for the participating shareholder, if he so elects. Such a plan is simple and convenient, and generally allows an investor to add to his share interests at a cost far less than an open market purchase. To join a DRP an authorization form is filed with the company or its agent, following follow-ing which subsequent cash dividends are used to purchase additional shares of common stock. For the corporation offering such plans, dividend reinvestment is a valuable source of funding, lessening the need for large public equity or bond financing. As an example, American Telephone took back over $1 billion in both 1980 and 1981 by way of its established shareholder reinvestment program. GUIDELINES Among the multitude of dividend plowback plans available there are certain cer-tain variations, but such more or less favorable features should not necessarily by a consideration in plan participation. Basic investment valuation, valua-tion, as such, continues to be the keystone. As examples of plan variables, some companies will absorb all costs in connection with dividend reinvestment, while others may charge a modest fee. Certain concerns will offer of-fer a 3 percent to 5 percent discount on shares purchased through reinvestment reinvest-ment of dividends. Another category of companies permit shareholders to combine com-bine outside cash with dividend payments to purchase additional shares, again in some cases with a discount dis-count option. Under a few plans companies com-panies will allow application of preferred prefer-red dividend payments or interest on company bonds to additional shares of common stock. TAX ACT OF 1981 In the fairly inclusive Economic Recovery Tax passed late last year, there was a boon to holders of electric utility shares. In particular, the Act provided that individual or joint holders of common stock in certain electric utilities could elect to treat as dividend divi-dend distributions in the years 1982 through 1985 reinvested under a company com-pany plan as "qualified reinvested dividends." Thus, they may exclude from taxable income, for Federal tax purposes, up to $750 per year of such reinvested dividends (a total of $1500 on a joint return) in each of the years in question. RETURN OF CAPITAL One gray area with respect to the utility dividends reinvested for the purpose pur-pose of the income tax exclusion feature is the status of portions of a dividend classified as "return of capital." These consist of all or part of a dividend derived from other than operating earnings and not taxed as current income. Return of capital lowers the cost basis of stock for tax purposes when the shares are sold. However, the return of capital portion of a dividend may not be used to benefit the $750 to $1500 annual income exclusion. The difficulty in sorting out companies com-panies disbursing return of capital is that such payments are difficult to forecast, and are usually not identifiable iden-tifiable until long after payments have been made. Hence, utility investors may find the income exclusion feature eroded by an undetermined future return of capital dividend. Telephone and natural gas utilities generally do not qualify for income exclusion; ex-clusion; also shares received through reinvestment must be held for more than one year, and if any other shares are sold within the year they will be considered as reinvested shares, subject sub-ject to ordinary taxes rather than capital gains rates. |