Dividends allow companies to pay out some of their earnings to reward you as a shareholder without you having to sell your stock. Dividend payments depend on stock ownership, but not on the date the dividend is actually paid. Knowing when dividend payments are determined, as well as the holding period to get special tax rates, helps you better manage your investments.
Only one thing matters when determining if you get the dividend: whether you owned the stock on the ex-dividend date. When a stock pays a dividend, it first declares the dividend, known as the declaration date. As part of the announcement, the ex-dividend date, which is the last day on which you can buy the stock and still receive the dividend, is set. Finally, after the ex-dividend date comes the dividend payment date (when the payment is actually made). Since the ex-dividend date is all that matters, you'll still receive the dividend if you sell the stock after the ex-dividend date but before the dividend payment date.
Dividends count as taxable income, but if you meet certain conditions, your dividend gets taxed at the lower long-term capital gains rates. If you don't meet the conditions, you have to pay the higher ordinary income tax rates on the dividends. A qualified dividend is one paid by a U.S. corporation or qualified foreign corporation; it is not a specifically nonqualified dividend such as a capital gains distribution. In addition, you must meet the holding period requirements.
Holding Period for Dividends
To meet the holding period for qualified dividends, you have to own the stock for at least 60 days within the 120-day period of 60 days before the ex-dividend date and 60 days after the ex-dividend date. For preferred stocks, the required holding period is 90 days within the 180-day period of 90 days before and 90 days after the ex-dividend date. When counting the days, include the date that you sold the stock, but not the day that you bought it. For example, if you bought the stock 45 days before the ex-dividend date and sold it 30 days after, your dividend is qualified.
Multiple Dividends Per Year
The dividend rules apply to each dividend paid during the year, and many companies pay quarterly dividends rather than annual dividends. Therefore, you might receive the first two quarterly dividends during a given year, but then not receive the final two dividends. In addition, the holding period for figuring whether you have a qualified or nonqualified dividend is figured separately, so your first dividend may be qualified while your second dividend may be nonqualified.
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