What are dividends?
A dividend is a portion of earnings that a company or mutual fund can give to you when you’re a shareholder.
Dividends can be either nonqualified (ordinary)—which are taxed as ordinary income, or qualified—which are taxed as long-term capital gains at a lower rate.
The sections below expand on dividends and how they are categorized.
Some companies distribute a portion of their earnings to owners of the company's stock. Investors usually receive an amount per share of stock owned. The dividend can be in the form of cash, stock, or property.
Some companies offer dividend reinvestment programs (DRiPs) that buy additional shares of stock for the investor rather than giving the investor the cash.
Investors buy shares of mutual funds, which often hold stock shares from different companies. Some of these companies issue dividends that the mutual fund pays out to the owners of the mutual fund shares.
Mutual funds also pay out any interest earned and profit made from buying and selling stock shares.
The distribution of the dividends from the stock owned by the fund and the interest earned is considered a dividend distribution from the mutual fund to the investor.
The distribution of gains from buying and selling stock shares or other assets is considered a capital gains distribution from the mutual fund to the investor.
Like some companies, mutual funds often offer dividend reinvestment programs (DRiPs) that buy additional shares of the mutual fund for the investor rather than giving the investor the cash.
Qualified dividends are a special type of dividend that often receive preferential tax treatment. They’re taxed as long-term capital gains (the rates are 0%, 15%, and 20%).
In order to be considered qualified dividends, they must:
- Be paid by an American company or a qualifying foreign company.
- Be paid between January 1, 2016 and December 31, 2016.
- Meet the holding period requirement for the stock. The holding period is at least 61 days during the 121-day period that begins 60 days before the *ex-dividend date.
(*The day after a company announces its dividend payments to shareholders.)
Generally, form 1099-DIV provides the details of qualified dividends.
Nonqualified (ordinary) dividends don’t receive any special tax treatment, they’re taxed as ordinary income.