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Inheriting Stock From Dad

When I was a kid, back in the 1970s, my dad would bring home his Wall Street Journal, and he would read the “B” section to spot good stocks. He loved to pick stocks. The thought process was simple: pick large companies you know and whose products you use. By today’s standards, his stock portfolio would be considered simple. Exxon (formerly Mobil), Johnson and Johnson, AT & T, and Philip Morris. There was a tremendous pride in owning a piece of corporate America.

In the 1970s, nearly 80% of all investors were men, and the best game in town was to buy individual stocks directly from the company, versus a brokerage account. Mutual funds did not capture the public’s attention until the late 1980s and 1990s. So, if you have a father or grandfather that was born in the 1930s or 1940s, chances are they used individual stocks to create wealth. Buying an individual stock back then meant buying and holding that stock for the long term, truly investing in the company. Certainly the process of purchasing stocks has changed dramatically. Historically, you would either have a stock-broker purchase the stock or you could actually purchase shares directly from the company. Every so often my dad would go into his small safe and show me the actual stock certificates. He never received a statement in the mail; his only proof of ownership were the certificates themselves. Coming home with the Wall Street Journal in hand, he would show me how to calculate what the stock was worth on any given day.

Aside from learning how to apply basic math to real life, I also learned how to calculate the PE (the ratio of Profit to Earnings) to help find “value” stocks, meaning a stock appears to be undervalued based on historical profits. At the start of the 1970s the average PE ratio of the S&P 500 ranged from 15-19, but over that decade of “stagflation” dropped to around 7. I began to understand dividends, and it was drilled into my mind that the only way to have a stock grow properly was to reinvest those dividends and buy more shares. How did he keep track of all of the additional shares? In a little black book. Of course, in the 1980s, the brokerage industry embraced technology and the stock certificates for additional shares stopped coming in the mail. This is when we began to have “certificated” and “non-certificated” shares as well as statements directly from the corporation.

Today, many of us are inheriting or have inherited individual stocks and have torn emotions as to what to do. It is impressive to see how such a small initial investment could grow so much. For example, if you invested $10,000 in the summer of 1970 into Exxon for 30 years and reinvested dividends you would have $3,980,000. Chevron would have grown to $2,150,000 and Johnson & Johnson $2,019.000 for the same time period (past performance is not necessarily indicative of future results). The wonderful gift of inheriting stock or mutual funds (that are held in non-retirement accounts) is all of that growth – may come to you free of tax! However, if you held inherited stock in your name for a period of years and then sold it, you could realize a long term capital gain or loss depending on the difference in the share price from when you took ownership to when you sold it.

If you have inherited stock, talk to your financial advisor and your tax advisor before making any decisions. There are many options to consider if you plan to leave as a legacy to your heirs. Pre-planning for the inevitable transfer of assets will help increase the tax efficiency of the gift you leave to your children, grandchildren, or a charity of your choosing.

Happy Father’s Day to all!

Roberta L. Nestor is a financial advisor practicing at 491 New Haven Avenue in Milford, CT offering retirement, long term care, investment and tax planning services. She also offers securities and advisory services as an Investment Adviser Representative of Commonwealth Financial Network – a member FINRA/SIPC and a Registered Investment Adviser. Fixed insurance products offered through Nestor Financial Network are separate and unrelated to Commonwealth. Commonwealth Financial Network or Nestor Financial Network does not provide legal or tax advice. You should consult a legal or tax professional regarding your individual situation. Roberta can be reached at Nestor Financial Network, 203-876-8066 or roberta@nestorfinancial.com.

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