Got a pretty big surprise today (guess that flashlight karma the other day paid off).
Our boys were given quite the gift today in the form of a fairly large amount of an individual company stock. They all were given a small amount of this stock when they were born and the default was to receive a dividend check quarterly. We just used the dividends to pay the registration and technology fees (yes a racket I know but required) for the boys schools as it was not really a whole lot of money. With this gift the numbers have changed dramatically. With 12-18 years of decent growth and even with the presumption college costs will continue to rise at a staggering pace. The boys college will likely be paid for and then some.
I don’t know much about investing or if we would have been better suited to reinvest those dividends but at the start the amount of stock was fairly small so I really did not worry about it.
My concern now is having all this tied up in a single pharmaceutical company’s stock. All you hear is lawsuit this, lawsuit that, big pharma is killing us all. Big pharma caused me to grow boobs so I am awarded 8 million dollars, never mind these drugs likely saved your life.
Just worrisome that these stocks may not be worth much on 12-18 years.

They were gifted to the boys in a custodial account (me being the custodian) is there a way I can diversify these stocks in some way to protect them a bit more?

Ford for the dividend, use the dividend to buy more Ford....forever.

If you are receiving the dividends regularly then the value is in the company. If the stock has split or gained in core value due to acquisitions then hold on to it. If it is a medium size pharma co they might be acquired and you win again. If it is Pfizer stock, buy more. Pfizer is the real giant in the pharma industry and expanding every year.

There are many schools of thought on investing, but most of them lie somewhere on the continuum between “You have to diversify, don’t put all your eggs in one basket.” and “Put all your eggs in one basket and watch it very very carefully.”

From my experience, the former can be much better for holding onto your money and the latter better for making (or losing) a lot of money.

If you sell some of the kids’ stock to diversify, your kids may be required to file a tax return and pay taxes on the gains. This isn’t something that should necessarily stop you if you are set on diversifying, just don’t fail to do it and get hit with penalties and interest. (Don’t ask me how I know.)

If you want to diversify, but are willing to be more patient about it, one way to do it would be to let the dividends accumulate as cash, then invest in other stocks.

It might be well worth getting some professional input if you can find a good one who is more concerned with your investing success than his commission income. They are out there, but not every advisor fits that description.

Congratulations to you and the kids and good luck on preserving and growing their nest eggs!

Ordinarily, I would say cash it in and buy a no load no fee growth fund.

BUt since you said it's a pharmaceutical company, i know a few. If it's Abbott, i would say hold on and see if you can reinvest the dividends. Abbott isn't run as a "pharmaceutical" company, it's a financial company. People have to make the top line and the bottom line. Senior management is good and the upcoming CEO in the pipeline is even better.

Baxter is another good company. It's not a pharma, it's an investment portfolio company. They buy and sell companies. They're good to hold.

If it's a real pharma, you have to determine what is their cash cow medicine, what are they doing to prolong the patent (they continually find some disease it can cure), and what their R&D pipeline looks like.

Good points by slosig.

I would add. Their cost basis in the shares will be measured by the original cost basis of the donor, the person that gifted it to them, so look at that as it relates to the market value to measure gain/loss if you sell any of it. The kids, owners, will be responsible for the tax, if any, on gains. If you are in no hurry to diversify, you could consider selling smaller amounts of it each year over a period of years keeping the gains each year below the kids standard deduction so that no tax is due. Slosigs thought of reinvesting the dividends received in cash into other stocks/bonds could help diversify the account. Another consideration is the "kiddie tax" for higher income individuals which may require the tax rate of the parents to be applied to income - that requires you to evaluate it with a Pro, see your CPA.

Take the dividend money and re-invest that into other investments in order to diversify over time. Mutual funds, other stocks, etc. or possibly a pre-paid college fund, depending on the amount

quote:

Originally posted by Rey HRH:
Ordinarily, I would say cash it in and buy a no load no fee growth fund.

BUt since you said it's a pharmaceutical company, i know a few. If it's Abbott, i would say hold on and see if you can reinvest the dividends. Abbott isn't run as a "pharmaceutical" company, it's a financial company. People have to make the top line and the bottom line. Senior management is good and the upcoming CEO in the pipeline is even better.

Baxter is another good company. It's not a pharma, it's an investment portfolio company. They buy and sell companies. They're good to hold.

If it's a real pharma, you have to determine what is their cash cow medicine, what are they doing to prolong the patent (they continually find some disease it can cure), and what their R&D pipeline looks like.

Johnson & Johnson

It sounds like the kids are young & you mention saving for college.

I’d check into any benefits of a 529 savings plan in your State then look to move some $$ towards such an account for each child. 529 plans & how they are treated can vary widely.

As an example, WI allows up to $3k per child contributions yearly taken off your taxable state income. The money then grows tax free. With a ‘self directed’ plan, costs are minimal with access to Vanguard funds.

In general, I’d try to move at least partially away from a single stock as the main investment. It depends on various factors, other investments, and maybe even what the relative giving expects.

You need to figure out and understand the tax implications of selling the stock. Having said that I think most investment "pros" recommend a maximum of 5% in any one individual stock. For precisely the reason you stated. Individual Stock Risk.
So if it can be done efficiently I'm diversifying. If memory serves J&J has already been drug into a big suit related to talcum powder of all things.

quote:

Originally posted by Black92LX:
.
My concern now is having all this tied up in a single pharmaceutical company’s stock. All you hear is lawsuit this, lawsuit that, big pharma is killing us all. Big pharma caused me to grow boobs so I am awarded 8 million dollars, never mind these drugs likely saved your life.
Just worrisome that these stocks may not be worth much on 12-18 years.

a very real concern.

but you just never know. I keep a final statement for my stock account with Enron on-hand to remind me of how even a touted investment can become worthless. Or you could pick the next Amazon.

i feel better keeping individual stock exposure -- all of them total -- to about 25% of the portfolio. the rest in index funds / index ETFs and cash.

Target Date Funds have become very popular lately and might be another option to look at. (heavy stock exposure the early decades then phasing to a higher fixed income mixture in later years...)

---------------------------------------------------------------

quote:

Originally posted by Black92LX:


Johnson & Johnson

of all the healthcare stocks out there - JNJ is one of the ones I would LEAST worry about.

Why ?? They are basically a healthcare mutual fund in a way.

Three main business units:

Consumer (bandaids, Neutragena, etc)
Pharmaceutical - ie medicine
Medical Devices

so their sales are pretty well diversified across all aspects of the healthcare environment. CEO Alex Gorsky is a West Point grad. Straight shooter.

JNJ is a solid stock definitely.

---------------------------------------

We had a similar situation back in the mid nineties where we were gifted some bank stock for our kids.
We decided to just reinvest the dividends as banks were considered a rather safe investment at the time compared to my more aggressive stock portfolio.

Well after several bank mergers etc. the value of the bank stock was enough to put both of our sons through college with just a little help from our investments. This was before the 529 program was available so that may affect your situation as we had to pay taxes on our withdrawals...

As I mentioned in the previous post, the tax basis for gain/loss purposes is the donor's original cost if gifted. I recommend that you get your hands on that information NOW and get it entered into the brokers system as "cost" and keep it handy in your "permanent files" for when any of it is sold. Do it now! 20 years from now when the donor is dead it is a lot more difficult to obtain the data.

If you want to read up on JNJ, go to www.seekingalpha.com and search the symbol JNJ. Several articles there on it. It is a "Dividend King", has increased its dividends > 50 years.

I own JNJ and it's one stock I'll probably never sell, despite the recent talcum powder law suit. As said, it's very well diversified and pays a solid dividend with a good record of increasing that dividend. With re-invested dividends, consider your "effective" yield in the future. You'll be quite happy.

Johnson & Johnson (NYSE: JNJ) was raised to Outperform from Market Perform with a $155 price target at Bernstein. The stock closed flat at $129.06. It has a 52-week range of $121.00 to $148.99 and a consensus target price of $149.35.

Thanks for all the input.
If I am picking up what you all are putting down, I did not think about tax implications and J&J seems to be a solid stock.

So at least for the time being keep the stock and reinvest the dividends?

What you want is to NOT be in a situation where you have all your eggs in one basket - any basket - because you absolutely need it to be there for the kids' education.

Before suggesting a path, it'd be key to know what percent of the kid's educational savings it represents? If it's the whole enchilada, then it doesn't matter how good that one stock currently looks, and it doesn't matter what the tax repercussions are, you don't want to bet their future on one thing.

Unlikely but possible case....lawsuit/failed merger/scandal hits, stock loses 40% before you get a chance to sell. What happens to college plans?

If this is it for the kids, sell the stock responsibly (yes, minimize tax costs - check with a tax pro about whether to do it all in one year, or spread over two, etc.) and use the proceeds to buy into a diversified, low cost US index fund.

quote:

Thanks for all the input.
If I am picking up what you all are putting down, I did not think about tax implications and J&J seems to be a solid stock.

So at least for the time being keep the stock and reinvest the dividends?

^^^^^^^^^^^^^^^^^^^^^^^^^^^^
It is a complicated matter. Eggs and baskets. You need some professional advice here. There are tax implications, but not as much as you might think. The cost basis needs to be figured to begin with. I paid for both of my childrens entire private college education including graduate school through dollar cost averaging into several no load mutual funds. About two to three hundred a month from the time they were born. All dividends were reinvested. Diversity is important as well as keeping up with inflation.

I have been very fortunate in managing my own retirement account, but it takes a lot of time and knowledge. I have owned Pfizer stock for years, but you have to be comfortable with the ups and downs. How would you feel if the stock fell 50 percent?

{the post above mine was not seen when I posted my response. I mention that because it is good advice}

quote:

Originally posted by Black92LX:
Thanks for all the input.
If I am picking up what you all are putting down, I did not think about tax implications and J&J seems to be a solid stock.

So at least for the time being keep the stock and reinvest the dividends?

Okay, I was trying to avoid being specific, but here is *one* idea. Please run it by professional help for a sanity check.

First, figure out the kid’s basis in the stock, the amount of income they can have without incurring taxes, and whether you can move the shares directly into a 529 plan and sell them there, avoiding tax. A good accountant should be able to help you figure out how much you can sell without incurring a tax liability. I personally would not be in such a hurry to diversify out of JNJ that I would pay taxes to do it. If you figure out all the above, you can sell/transfer/whatever that amount each year (note you need to check each year as amounts may change) and have it available to invest in other stocks or investments.

Please don’t Di-worse-ify though. JNJ is a good company that has done well for many years. Please don’t be in a hurry to dump it without identifying other things that you are comfortable will be at least an equally good investment. The worst possible thing could be selling 95% of it (to get down to the 5% many brokers recommend as a max), paying a bunch of taxes on the sale, then investing whatever scraps the government leaves you in a shotgun pattern just to be diversified.

Sure something bad could happen to JNJ, but I wouldn’t bet on it. I’d encourage you to diversify prudently and tax efficiently, with professional help.