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Nov 30 2014

My Latest Sale: Employer’s Stock Grant

For nearly half my working life, I’ve worked for small-medium sized privately held companies, but for the past 14 years I’ve worked for a company that’s owned by a Fortune 100 corporation. Part of my compensation and benefits package is the parent company’s stock options and stock grants. I usually cash out a stock option when its expiration date is fast approaching and sell granted stock shares when I need the capital and/or the stock price is at an attractive high. I am granted a small number of shares annually, which is a nice supplement to my income when I do move to sell those shares.

For the past couple years, my employer’s stock has been on a steady upward trend, and last year I sold shares at ever rising prices. Ever since the mid-October dip, the stock price has had especially strong growth, reaching new historical highs 2-3 times per week. I put in a sell order of 25 shares a couple weeks ago, and on Black Friday the stock price reached and slightly exceeded my target price of $60.32. I was pleasantly surprised to see my sell order go through, as the stock’s growth rate had slowed a bit during the previous week, so I didn’t expect the price to trigger the sell order until some time in December.

I wish I could say my employer pays a mighty dividend to shareholders, but no, the dividend is not very good. Even though the dividend has been steadily increasing during the past two years, it’s currently little more than 1%. Quite a lackluster yield compared to the 9% yield my dividend portfolio averages. The stock’s dividend accounts for a paltry 0.53% of my total dividend income, so reducing or even eliminating dividend income from the stock would have a negligible impact. Selling off the stock and reinvesting in an ETF with even a modest yield would certainly enhance my dividend income.

A poor dividend yield isn’t the only reason for wanting to sell. A couple months ago I took a hard look at my paycheck stub and was surprised to learn that dividend payouts get deducted from my pay. WHAT?!! So when the stock paid out $8.25 last quarter, my paycheck took an $8.25 hit. Given that, I had to ask myself: what’s the point of owning the stock except for capital gains? It sure as hell isn’t for a dividend that gets cancelled out by a paycheck deduction.

I did a little research into why my employer’s stock dividend payout is deducted from my pay, and here’s what I found (bold text my emphasis):

Some employers choose to pay dividends on restricted stock. In that event, income must be recognized by the employee. The question is whether it is compensation income (i.e., subject to ordinary income tax rates) or dividend income (i.e., subject to the favorable tax treatment of qualified dividends under Section 1(h)(11)). The answer depends on whether a Section 83(b) election has been made. If no Section 83(b) election has been made, then the dividend is compensation income (i.e., ordinary income) and is deductible by the employer as compensation expense. If a Section 83(b) election has been made, however, the dividends are treated as dividend income rather than compensation.

G. Edgar Adkins, Jr., and Jeffrey A. Martin
Restricted stock: the tax impact on employers and employees

So in essence, dividends from the granted stocks are considered PART of compensation, not an ADDITION to compensation.

When my granted stocks vest, I have to elect how the stocks are taxed. I normally opt for paying the tax immediately by taking fewer stocks instead of paying the taxes later. I don’t know if the dividend income deducted from my paycheck is a result of my taxation choice or not. For next year’s stock grant, I will choose differently and see what happens.

To summarize, I had two good reasons to sell:
Poor yield. I can get better yields elsewhere.
No real dividend income. What goes into my brokerage account comes out of my paycheck.

I still have 25 shares remaining, which I will continue to hold for a little while longer. Hopefully the stock price will continue its upward trend and I can sell those off at an even higher price.

Addendum (12/4/14):  I didn’t wait too long. I just sold 20 shares at $60.50, with only 5 shares remaining. Why didn’t I just sell off all the stock? I’m going to hold a few shares simply because I want to be able to say that I’m a shareholder of my employer’s stock.

Image Credit: Jorge Franganillo (flickr.com)