Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ======Qualified Dividends====== A Qualified Dividend is a type of [[dividend]] that, under United States tax law, is eligible for a lower tax rate than other types of investment income. Instead of being taxed at an investor's standard [[ordinary income]] tax rate, which can be quite high, qualified dividends are taxed at the much more favorable long-term [[capital gains]] tax rates. Think of it as a tax discount the government offers to encourage long-term investment in stable, dividend-paying companies. To earn this "qualified" status, the dividend must meet a specific set of criteria set by the [[Internal Revenue Service]] (IRS), primarily concerning the type of company paying the dividend and how long the investor has held the stock. While this specific term is a creature of the U.S. tax code, many countries, including several in Europe, offer similar preferential tax treatment for dividend income, so the underlying principle of rewarding long-term shareholders is widely relevant for global investors. ===== Why You Should Care: The Tax-Man Cometh... Less! ===== The difference between a qualified and a non-qualified (or "ordinary") dividend can be substantial, directly impacting your investment returns. The impact of taxes on your portfolio's growth is known as [[tax-drag]], and qualified dividends are a powerful tool to reduce it. Let's imagine you're a U.S. investor in the 24% federal income tax bracket and you receive $1,000 in dividends. * If the dividend is **ordinary**, you'd owe the government $240 (24% of $1,000). * If the dividend is **qualified**, you'd likely fall into the 15% capital gains bracket. You'd owe just $150 (15% of $1,000). That's an extra $90 in your pocket, not the tax-man's. Over a lifetime of investing, savings like these compound and can add up to a significant sum. Your brokerage firm will clearly report which of your dividends were qualified on your annual [[1099-DIV]] tax form, so you don't have to do the complex calculations yourself. ===== The Nitty-Gritty: What Makes a Dividend "Qualified"? ===== For a dividend to get the five-star "qualified" rating, it has to pass a few key tests. It's like a bouncer at an exclusive club—not just any dividend gets in. ==== Source of the Dividend ==== The dividend must be paid by either a U.S. corporation or a [[qualified foreign corporation]]. A foreign corporation generally gets this status if its stock is readily tradable on an established U.S. stock market (like the NYSE or NASDAQ) or if the company is incorporated in a country that has a comprehensive income tax treaty with the United States. This means dividends from many large, well-known European and Asian companies can indeed be qualified. ==== The Holding Period Requirement ==== This is the most important test for you, the investor. You can't just buy a stock the day before it pays a dividend, collect the cash, and sell it the next day to get the tax break. The IRS requires you to be a genuine, long-term investor. To meet the [[holding period]] requirement for common stock, you must have held the stock for **more than 60 days during the 121-day period** that begins 60 days //before// the [[ex-dividend date]]. //Woah, that sounds complicated!// Let's simplify. The ex-dividend date is the day on which the stock starts trading without the value of its next dividend payment. Think of the 121-day window as a test period centered around this date. You just need to have held the stock for at least 61 of those days. For most long-term investors, this happens automatically. The rule is mainly there to prevent short-term traders from gaming the system. For [[preferred stock]], the holding period is a bit longer: more than 90 days during the 181-day period beginning 90 days before the ex-dividend date. ==== What's //Not// a Qualified Dividend? ==== Even if they look and feel like dividends, certain payments from investments are specifically excluded from being qualified. Be aware of these common exceptions: * Dividends from [[REITs]] (Real Estate Investment Trusts) and [[MLPs]] (Master Limited Partnerships) are typically not qualified. * Dividends paid by tax-exempt organizations. * A [[special dividend]] or "one-time" dividend may or may not be qualified; it depends on whether it meets all the other criteria. Always check. * Payments received in lieu of dividends. This can happen, for example, if your shares have been loaned out by your broker for a [[short selling]] transaction. ===== A Value Investor's Perspective ===== As a [[value investor]], the allure of a tax break is nice, but it should never be the primary reason you buy a stock. Your focus must remain squarely on the fundamentals: a solid business you understand, a durable competitive advantage, competent management, and a price that is below the company's [[intrinsic value]]. That said, a history of paying consistent, qualified dividends can be a positive signal. It often indicates a mature, disciplined company that generates more cash than it needs for internal reinvestment—a hallmark of many great value investments. Think of the dividend as a reward for your patient ownership. Legendary firms like Johnson & Johnson or Coca-Cola have rewarded shareholders this way for decades. However, don't dismiss companies that pay little or no dividend. A fantastic growth company might create far more value by reinvesting every dollar of profit back into the business, as [[Berkshire Hathaway]] famously did for most of its history. The bottom line: View qualified dividends as the cherry on top of an already delicious investment cake, not the cake itself.