What are Dividends
Dividends are payments that you receive from a corporation for owning shares of a stock or mutual fund. Companies can choose to invest excess cash back into the business, repurchase shares of stock or pay cash to their shareholders in the form of a dividend.
Coca Cola, Pepsi and McDonald’s pay dividends. A dividend can be paid on a yearly, quarterly or monthly basis. Most companies pay quarterly.
Dividend Aristocrats and Kings
Dividend aristocrats are part of the S&P 500. An aristocrat has paid and increased its dividend for at least twenty five years straight. For example, AT&T has paid a dividend for 37. Coca Cola and Johnson & Johnson are dividend kings. A dividend king has paid a dividend for 50 plus years in a row.
Real Estate Investment Trust (REITS) are required to pay out 90% of their net income to shareholders in the form of a dividend. As a result, they receive special tax advantages.
Dividends are Taxable
Dividends are taxable to shareholders. If you receive a dividend payment, report them on your tax return rather you received it in cash or reinvested the dividend.
A qualified or non-qualified dividend will determine the tax. Qualified dividends receive a lower tax rate, non-qualified are taxed as ordinary income.
In order for a dividend to be qualified, it has to be paid by a company from the United States or a qualified corporation.
Retirement Accounts
The best place to receive a dividend is in a retirement account. In a Roth IRA or 401K they benefit from the magic of compound interest.
Dividends received in a Roth IRA account grow tax free, but if it’s in a traditional Roth or 401K tax deferred. The money will be taxed as income the year you withdraw the funds. Until then your dividends will benefit from compounding year after year. For more information on taxes and dividends go to http://www.irs.gov.
Always seek advice from a tax professional before you invest.