Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Ordinary Dividend

What it is:

An ordinary dividend is a dividend that is not eligible for capital gains tax.

How it works (Example):

For example, let’s assume that John Doe holds 10,000 shares of Company XYZ stock, which pays $0.20 per year in dividends. In total, John Doe receives 10,000 x $0.20 = $2,000 per year in dividends from Company XYZ. Because Company XYZ does not pay qualified dividends, John Doe must pay ordinary income tax (say, 35%) rather than capital gains tax (say, 15%) on the dividends.

In order to be a qualified dividend, the dividend must come from an American company (or a qualifying foreign company), must not be listed as an unqualified dividend with the IRS, and must meet a required holding period. In general, the holding period is at least 60 days for common stock, 90 days for preferred stock, and 60 days for a dividend-paying mutual fund.

Why it Matters:

Capital gains taxes are usually lower than ordinary income taxes, which means that qualified dividends can save investors money.