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<ul class="summary-list"><li>A qualified <keyword id="11911187" type="UNKNOWN" weightage="60" keywordseo="dividend" source="Orion">dividend</keyword> is a dividend that's taxed at a lower rate for meeting certain criteria.</li><li>Criteria includes shares from domestic corporations and certain qualifying foreign companies, which must be held for a specific period of time, known as the holding period.</li><li>These dividends are taxed federally at the capital gains rate, which varies based on an investor's MAGI and taxable income.</li></ul><p>For investors, dividends can be one of the most rewarding features of owning a <keyword id="11911182" type="UNKNOWN" weightage="60" keywordseo="stock" source="Orion">stock</keyword>. <a href="https://www.businessinsider.com/what-is-a-dividend" target="_blank" rel="noopener">Dividends</a> are payments that shareholders receive from a company's earnings. This can be seen as a thank you note in the form of cash for investing in the company. </p><p>Receiving a dividend payment for the investor is a source of income, and like most forms of income, there can be tax implications. Dividends can be taxed either as ordinary dividends (also known as nonqualified) or as qualified dividends, with each of these classifications carrying significant differences in tax rates. </p><h2><strong>What is a qualified dividend? </strong></h2><p>Qualified dividends are <keyword id="12137263" type="UNKNOWN" weightage="60" keywordseo="dividend-payments" source="Orion">dividend payments</keyword> that are taxed at the long-term capital gains rate, which is lower than the ordinary income tax rates. For a dividend to be qualified there are certain criteria that must be met, according to the IRS. </p><p>For stocks the criteria is: </p><ul><li>The stock must be held for at least 61 continuous days, unhedged, out of the 121-day period, beginning 60 days before the ex-dividend date. </li><li>In some cases, like with <a href="https://www.businessinsider.com/what-is-preferred-stock" target="_blank" rel="noopener">preferred stock</a>, it must be held for 91 out of the 181-day period, beginning 90 continuous days before the ex-dividend date. </li></ul><p>What is the <a href="https://www.businessinsider.com/ex-dividend-date" target="_blank" rel="noopener">ex-dividend date</a>? This is the date on which the stock will trade without its dividend rights, meaning the previous owner will be entitled to the next dividend payment. Unhedged means that you cannot have any options like <a href="https://www.businessinsider.com/put-option" target="_blank" rel="noopener">puts</a> or <a href="https://www.businessinsider.com/call-option" target="_blank" rel="noopener">calls</a> that are related to the stock - and you cannot have any short sales during the period.  </p><h2><strong>Example of qualified dividends in action</strong></h2><p>The ex-dividend date is October 1, meaning that the 121-day holding period begins on August 2, which is 60 days before the ex-dividend date. You buy 100 shares of ABC company on September 15 of the same year. On November 9 of the same year, you sold the stock.</p><p>During this time, you did not receive qualified dividends. This is because you only held the stock for 55 days (September 15 to November 9), not the required 61 days, and you may be taxed at the ordinary income rate. For the dividends to be qualified, you would have needed to hold the stock through November 15.</p><h2><strong>Understanding how qualified dividends work </strong></h2><p>From the investor's perspective, qualified dividends procedurally work in similar ways as ordinary dividends - with one exception. "It all comes down to how they're taxed," says Akeiva M. Ellis, MSFP, Certified Financial Planner financial education specialist at <a href="http://www.ballentinepartners.com/" target="_blank" rel="noopener nofollow sponsored">Ballentine Partners</a>. "Regular dividends get taxed at your ordinary income tax rate, just like your wages and other earned income. Qualified dividends are currently taxed at the lower, preferential rates that long-term capital gains income gets," Ellis notes. </p><p>In addition to the holding period requirements, the IRS specifies that qualified dividends must be paid to an investor by a US company or a qualified foreign company. But not every dividend received will be qualified, even if you meet the holding period. "Some dividends do not count as qualified dividends. These include those paid by <a href="https://www.businessinsider.com/what-is-a-reit" target="_blank" rel="noopener">Real Estate Investment Trusts</a> (REITs), employee stock options, and tax-exempt organizations," says Ellis. In addition to those, dividends paid on deposits at banks and credit unions do not count as qualified dividends and are instead reported as <a href="https://www.businessinsider.com/interest-income-taxes" target="_blank" rel="noopener">interest income</a>, taxed at ordinary income rates. </p><p><strong>Quick tip: </strong>A qualified foreign company must meet any of the following requirements according to the IRS: (1) The company is incorporated in a US possession, (2) the company is eligible for benefits of a comprehensive income tax agreement with the U.S. Treasury, or (3) the company does not meet the first two definitions but is "readily tradable" on an established <a href="https://www.businessinsider.com/stock-exchange" target="_blank" rel="noopener">stock market exchange in the US</a>.</p><h3>Qualified dividend tax rates</h3><p>Qualified dividends were not a part of the tax code until the <a href="https://www.congress.gov/bill/108th-congress/house-bill/2" target="_blank" rel="noopener nofollow sponsored">Jobs and Growth Tax Relief Reconciliation Act of 2003</a>. Prior to this, all dividends were taxed at the ordinary income tax rate. The argument for policymakers at the time was that the lower rates for qualified dividends would incentivize companies to reward long-term investors with higher dividend payments. If successful, that money would then be circulated through the economy and generate growth.  </p><p>Here's a breakdown of the tax rates:</p><h3><div type="image" title="capital gains 06" height="4689" width="5001" msid="86380265" hostid="261"></div></h3><p>Remember, not every stock will pay a dividend. If you receive any dividend in your investing account you should receive <a href="https://www.irs.gov/forms-pubs/about-form-1099-div" target="_blank" rel="noopener nofollow sponsored">Form 1099-DIV</a> at the end of the year from your brokerage firm. The amount you have earned in qualified dividends should appear in box 1b. </p><p>Retirement accounts can nullify the impact of taxes on dividends. For pre-tax retirement accounts like a <a href="https://www.businessinsider.com/what-is-401k" target="_blank" rel="noopener">401(k)</a> and Traditional IRA, all taxes are deferred until withdrawal, at which point only ordinary income taxes will be applied, and the annual taxes on dividends will be avoided.</p><p>For after-tax retirement accounts like a <a href="https://www.businessinsider.com/how-to-open-roth-ira" target="_blank" rel="noopener">Roth IRA</a> or Roth 401(k), withdrawals can be tax free including any dividend income generated under certain conditions. In the case of a Roth IRA, those conditions are that you are 59.5 years old and you have had the account for at least five years. </p><p><strong>Quick Tip: </strong>There's a difference between taxes on dividends and the capital gains tax though the tax rates can be identical if the dividends are qualified. Dividend taxes may occur each year a dividend is paid out, whereas capital gains taxes are only paid in the year the stock is sold for a profit.</p><h2><strong>Ordinary dividends vs. qualified dividends</strong></h2><p>As the name implies, ordinary dividends - sometimes referred to as nonqualified dividends - are taxed at the ordinary capital gains rates. The main difference between ordinary dividends and qualified dividends are how they're taxed:</p><table style="border-collapse: collapse; width: 100%;" border="1"><tbody><tr><td style="width: 50%;">Ordinary dividends</td><td style="width: 50%;">Qualified dividends</td></tr><tr><td style="width: 50%;"><strong>Taxed at ordinary income tax rates of: 10%, 12%, 22%, 24%, 32%, 35%, and 37%</strong></td><td style="width: 50%;">Taxed at the capital gains tax rates of: 0%, 10% and 15% </td></tr></tbody></table><p>Of course, another difference between the two is that qualified dividends must meet certain criteria, like the holding period, which we mentioned before.</p><h2><strong>The financial takeaway</strong></h2><p>Taxes can have a significant impact on your investing strategy and your overall returns. It is important to understand how to manage your investments in a way that minimizes your tax liability and maximizes your financial security, and qualified dividends can be one important piece to that strategy.</p><a data-type="5fbd2a0a644aa7500e72a005">What is common stock? The most typical way to invest in a company and profit from its growth</a><a data-type="601c6735aa63e05ca5387c27">Short selling is a high-risk but high-reward trading strategy that profits from a stock price's fall</a><a data-type="5f6e1a78bf96b91f2b0c4c71">The difference between a Roth 401(k) and a traditional 401(k), and how to decide which retirement plan is right for you</a><a data-type="6130f82bf8805a14a905a928">What's the difference between a pension and a 401(k)?</a>

Understanding what qualified dividends are why they're taxed at lower rates

<p><strong><strong><strong><strong><em><strong>FA Insights is a daily newsletter from Business Insider that delivers the top news and commentary for financial advisors.</strong></em></strong></strong></strong></strong></p>
<p><strong><strong><strong><strong><strong><a href="http://www.gluskinsheff.com/Home">The Dividend Theme Is Far From Over</a> (Gluskin Sheff) </strong></strong></strong></strong></strong></p>
<p>Though dividend-paying stocks are trading at 15x trailing multiples compared with 14x P/E for the rest of the market, David Rosenberg says the divided theme is far from over because baby boomers are still looking for a "retirement map".</p>
<p>"Dividend-paying stocks generated a total return of 42% in the past five years, handily beating the 26% return triggered by the rest of the universe. So where we go from here is quite clear. It's not just about 'yield' any more but about the company's ability to grow the dividend over time and do so without resorting to debt markets or sacrificing reinvested growth in the company. It is a fine line but dividend growth is now vital and there are now industrials and consumer products companies (not just utilities and telcos) who fit that bill.</p>
<p>"..What so many pundits are missing –and this is so evident in the bond market as well – is how the secular demographic shifts are causing a semi-permanent reassessment of how much 'income' in general – whether in income equity, long-short strategies or in fixed income – and this theme has many  more legs to go, in my opinion."</p>
<p><strong><strong><strong><strong><strong><a href="http://online.wsj.com/article/SB10001424127887324880504578300311439227952.html?mod=googlenews_wsj">A Massachusetts Regulator Wants The SEC To Ban A Mandatory Arbitration Clause </a>(The Wall Street Journal)</strong></strong></strong></strong></strong></p>
<p>A Massachusetts regulator is asking the SEC to ban an arbitration clause found in contracts between advisors and their clients. The clause prevents clients from taking their claims on losses or other damages to court. </p>
<p>Nearly half of investment advisors surveyed in Massachusetts had the clause in their contracts and Secretary of the Commonwealth William F. Galvin wrote to the SEC saying this clause was "troubling and a cause for regulatory concern".</p>
<p><strong><a href="http://www.advisorone.com/2013/02/11/vanguards-brennan-embrace-innovation-beware-prolif?ref=hp">ETFs Are One Of The Key Reasons That It's Such A Great Time To Be An Advisor </a>(Advisor One)</strong></p>
<p>Vanguard Group's Chairman Emeritus Jack Brennan said this is "the best time ever" to be a financial advisor and this is in large part because of products like ETFs. <br /><br />ETFs he said give advisors time to build their business since they offer diversity and are transparent and tax-efficient. "For 19 basis points, you get the Harvard endowment." Brennan did warn against too much innovation among ETFs for instance actively managed ETFs since that would introduce manager risk.</p>
<p style="overflow: hidden; color: #000000; background-color: #ffffff; text-align: left; text-decoration: none;"><strong><a href="http://www.businessinsider.com/stock-market-response-to-the-sotu-2013-2">How The Stock Market Has Reacted To Every State Of The Union Since 1934</a> (LPL Financial)</strong></p>
<p style="overflow: hidden; color: #000000; background-color: #ffffff; text-align: left; text-decoration: none;">President Obama delivered his State of the Union (SOTU) speech last night in which he called for $9 minimum wage. </p>
<p style="overflow: hidden; color: #000000; background-color: #ffffff; text-align: left; text-decoration: none;">Most SOTU speeches cause a less than 1 percent move in stock markets. Here is a look at the post-SOTU stock market moves since 1934.</p>
<p style="overflow: hidden; color: #000000; background-color: #ffffff; text-align: left; text-decoration: none;"><table class="image-container" width="200"><tr><td><div class="image"></div><p class="source"><a href="http://lplfinancial.lpl.com/Documents/ResearchPublications/Weekly_Market_Commentary.pdf">LPL Financial</a></p></td></tr></table></p>
<p style="overflow: hidden; color: #000000; background-color: #ffffff; text-align: left; text-decoration: none;"><strong><br /></strong></p>
<p style="overflow: hidden; color: #000000; background-color: #ffffff; text-align: left; text-decoration: none;"><strong><a href="http://www.businessinsider.com/thoughts-on-the-great-rotation-2013-2">Why The Great Rotation Won't Be As Good For Stocks As You Think</a> (Marc To Market)</strong></p>
<p style="overflow: hidden; color: #000000; background-color: #ffffff; text-align: left; text-decoration: none;">Those talking about the Great Rotation have argued that money is moving out of bonds into stocks and that there is more money in equity funds now that there was in all of 2012. But Marc Chandler at Brown Brothers Harriman disagrees. </p>
<p style="overflow: hidden; color: #000000; background-color: #ffffff; text-align: left; text-decoration: none;">"There is a third asset class that needs to be integrated into the analysis:  cash.  After surveying the data and various reports, it looks to us that the flows into equities is not coming out of fixed income but rather money market funds and deposits</p>
<p style="overflow: hidden; color: #000000; background-color: #ffffff; text-align: left; text-decoration: none;">"Through last week, equity funds (counting ETFs) saw an inflow of around $70 bln (compared with $23 bln in all of 2012).  The $30 bln inflows being reported by bond funds is a major argument against the "Great Rotation", though this is a bit off the pace seen last year ($40 bln inflows during the same period)."</p>

FINANCIAL ADVISOR INSIGHTS: Baby Boomers Are Keeping The Dividend Investment Strategy Alive

<p><strong>Top of the morning, <keyword id="11893875" type="UNKNOWN" weightage="100" keywordseo="markets" source="Orion">markets</keyword> people. </strong>Phil Rosen here, writing to you from a humid and glistening New York. </p><p>Growing up, when I heard adults talk about "refinancing," it sounded awfully boring. But since covering Wall Street, I've learned that there's real drama in housing markets. </p><p>Today I'm breaking down what's going on with US mortgages, and why you should care. </p><p><em>If this was forwarded to you, </em><a href="https://www.businessinsider.com/subscription/newsletter/10-things-opening-bell"><em>sign up here</em></a><em>. Download Insider's app </em><a href="https://www.insider.com/app"><em>here.</em></a></p><p><a href="https://markets.businessinsider.com/news/bonds/mortgage-applications-inflation-housing-market-demand-fed-rate-hike-mba-2022-7"></a></p><p><strong>1. Mortgage demand is at a 22-year low. </strong>That means the last time Americans were this <a href="https://markets.businessinsider.com/news/bonds/mortgage-applications-inflation-housing-market-demand-fed-rate-hike-mba-2022-7">discouraged by the housing market</a>, George W. Bush was starting his first term and a gallon of gas was about $1.50.</p><p>According to the Mortgage Bankers Association, mortgage demand slipped 6.3% last week as high prices throttled US residential real estate. That makes <a href="https://markets.businessinsider.com/news/bonds/mortgage-applications-inflation-housing-market-demand-fed-rate-hike-mba-2022-7">three consecutive weeks of declines</a>, and suggests more downside ahead. </p><p>"Purchase activity declined for both conventional and government loans, as the weakening economic outlook, high inflation, and <a href="https://markets.businessinsider.com/news/bonds/mortgage-applications-inflation-housing-market-demand-fed-rate-hike-mba-2022-7">persistent affordability challenges</a> are impacting buyer demand," the MBA's economic forecaster said.</p><p>There's a lot at play here. For one, mortgage rates have roughly doubled this year, from about 3% in January to close to 6% this month.</p><p>But prices aren't coming down — at least not yet. Despite declining sales, <a href="https://affiliate.insider.com?u=https%3A%2F%2Fwww.wsj.com%2Farticles%2Fu-s-home-sales-fell-again-in-june-economists-estimate-11658309401">last month marked another all-time high</a> for median home prices. </p><p>The MBA's refinancing index, meanwhile, plummeted 4% over the last week and <a href="https://markets.businessinsider.com/news/bonds/mortgage-applications-inflation-housing-market-demand-fed-rate-hike-mba-2022-7">80% over the last year</a>.</p><p><strong>And soaring inflation hasn't helped. </strong>High prices and surging rates are weighing on buyer sentiment. In turn, <a href="https://markets.businessinsider.com/news/bonds/housing-market-home-prices-builders-inflation-fed-interest-rates-nahb-2022-7">homebuilders are more pessimistic about the market</a> than at any point since the start of the pandemic. <br /><br />Moody's chief economist Mark Zandi even warned <a href="https://markets.businessinsider.com/news/stocks/us-housing-market-deep-freeze-mortgage-rates-home-price-moodys-2022-7">the housing market is about to enter a "deep freeze,"</a> as first-time homebuyers can't afford to buy in. </p><p>The takeaway from all of this is that the <a href="https://markets.businessinsider.com/news/bonds/mortgage-applications-inflation-housing-market-demand-fed-rate-hike-mba-2022-7">housing market</a> has certainly cooled, but not quite enough for buyers to be able to cope with higher mortgage rates on top of prices that appear to still be climbing. </p><p><u><strong>In other news:</strong></u></p><p><a href="https://markets.businessinsider.com/news/stocks/recession-risk-fed-rate-hike-inflation-strong-labor-market-bofa-2022-7"></a></p><div type="image" title="Grocery store shopper inflation" height="1250" width="2500" msid="93030269" hostid="261" sizebytes="331506"></div><p><strong>2. US stock futures traded mixed early Thursday. </strong>Meanwhile, <a href="https://markets.businessinsider.com/news/commodities/gas-prices-oil-drops-on-signs-of-demand-destruction-highs-2022-7">oil tumbled by 4%</a> and European stocks fell as investors brace for the European Central Bank's meeting later today, with the bank set to hike interest rates for the first time in over a decade. <a href="https://markets.businessinsider.com/news/stocks/stock-market-today-stocks-fall-with-ecb-earnings-in-focus-2022-7">Here are the latest market moves.</a></p><p><strong>3. On the docket: </strong>Philip Morris Inc., Blackstone, and more, <a href="https://markets.businessinsider.com/earnings-calendar?nr_email_referer=1&amp;utm_source=Sailthru&amp;utm_medium=email&amp;utm_content=Opening_bell&amp;utm_campaign=new:%2010%20things%20before%20the%20opening%20bell">all reporting</a>. Plus, look out for the unemployment insurance weekly claims report from the US department of Labor. </p><p><strong>4. The manager of the top-performing large-cap mutual fund of 2022 shared how he's found success in a bear market through dividend investing. </strong>The portfolio expert talked about the philosophy and strategy he uses to secure gains. <a href="https://www.businessinsider.com/stocks-how-to-invest-dividend-strategy-tips-best-investor-manager-2022-7">These are his eight favorite stock market opportunities right now.</a></p><p><strong>5. The Fed will focus on taming hot inflation as the strong labor market still points to a lower recession risk, Bank of America analysts said Wednesday. </strong>In a note to clients, BofA said solid employment data suggests the economy has steady underlying momentum, which reduces the risk of a downturn. <a href="https://markets.businessinsider.com/news/stocks/recession-risk-fed-rate-hike-inflation-strong-labor-market-bofa-2022-7">Here's what you want to know.</a></p><p><strong>6. Russia resumes flows of fuel through Nord Stream 1 pipeline. </strong>The pipeline closed for a 10-day maintenance program and <a href="https://markets.businessinsider.com/news/commodities/eu-gas-consumption-rationing-europe-energy-crisis-russia-nord-stream-2022-7">concerns had grown that operations would not resume</a>. But the return of flows has temporarily <a href="https://markets.businessinsider.com/news/commodities/europe-energy-crisis-russian-nord-stream-flows-resume-euro-surges-2022-7">eased fears of an immediate energy crisis in Europe</a>. </p><p><strong>7. Veteran investor Jeremy Grantham forecasted that weak earnings are going to drag on stocks. </strong>What's more, the market historian and GMO cofounder said the slump in asset prices could be prolonged — <a href="https://markets.businessinsider.com/news/stocks/jeremy-grantham-stocks-market-bubble-speculation-crash-earnings-sp500-recession-2022-7">and added that the S&amp;P 500 might plunge another 25%</a>.</p><p><strong>8. Morningstar's chief market strategist said these stocks offer safe and stable gains during the bear market.</strong> Defensive stocks have been overlooked in recent months, but Dave Sekera said now is the time to invest in the asset class to secure profits.<a href="https://www.businessinsider.com/investing-cheap-safe-stocks-to-buy-gains-bear-market-morningstar-2022-7"> See his 9 picks.</a></p><p><strong>9. Crypto billionaire Sam Bankman-Fried said the crypto market may have reached the bottom. </strong>He broke down why the next phase of digital assets will be about user-friendly apps and institutional money — <a href="https://www.businessinsider.com/sam-bankman-fried-on-when-crypto-bottom-2022-7">and what developments he's most excited about next</a>.</p><p><a href="https://markets.businessinsider.com/stocks/tsla-stock"></a></p><div type="image" title="Tesla stock July 21, 2022." height="1231" width="1642" msid="93030272" hostid="261" sizebytes="44166"></div><p><strong>10. Shares of Tesla rose after the EV giant reported earnings after the bell Wednesday. </strong>Second-quarter earnings beat Wall Street estimates, despite a factory shutdown in China. Tesla said it sold <a href="https://www.businessinsider.com/tesla-bitcoin-converted-to-fiat-crypto-crash-elon-musk-2022-7?r=US&amp;IR=T" target="_blank" rel="noopener noreferrer">75% of its bitcoin holdings</a>, after spending $1.5 billion on the cryptocurrency in 2021. <a href="https://markets.businessinsider.com/stocks/tsla-stock" target="_blank" rel="noopener noreferrer">Check out how the stock is moving this morning</a>.</p><p>Keep up with the latest markets news throughout your day by checking out <a href="https://link.chtbl.com/therefresh">The Refresh from Insider</a>, a dynamic audio news brief from the Insider newsroom. <a href="https://link.chtbl.com/therefresh"><strong>Listen here.</strong></a></p><p><em>Curated by Phil Rosen in New York. (Feedback or tips? Email </em><a href="mailto:prosen@insider.com"><em>prosen@insider.com</em></a><em> or tweet </em><a href="https://twitter.com/philrosenn"><em>@philrosenn</em></a><em>).</em></p><p><em>Edited by Max Adams (</em><a href="https://twitter.com/maxradams"><em>@maxradams</em></a><em>) in New York and Hallam Bullock (</em><a href="https://twitter.com/hallam_bullock"><em>@hallam_bullock</em></a><em>) in London. </em></p>

Mortgage applications have cratered to their lowest point since 2000. Here's what it means and why you should care

<ul class="summary-list"><li><keyword id="6500564" type="UNKNOWN" weightage="60" keywordseo="Dividends">Dividends</keyword> from stocks or funds are taxable income, whether you receive them or reinvest them.</li><li>Qualified dividends are taxed at lower capital gains rates; unqualified dividends as ordinary income.</li><li>Putting dividend-paying stocks in tax-advantaged accounts can help you avoid or delay the <keyword id="6368033" type="UNKNOWN" weightage="60" keywordseo="taxes">taxes</keyword> due.</li></ul><p>When you invest in a company by purchasing individual stocks, mutual funds, or exchange-traded funds (ETFs), you may be rewarded with <a href="https://www.businessinsider.com/what-is-a-dividend" target="_blank" rel="noopener">dividends</a>. A dividend is a per-share portion of the company's profits that gets distributed regularly to its stockholders - sort of like a quarterly bonus. </p><p>Like most other types of investment income, the IRS deems dividends to be taxable. However, not all dividends are treated - or taxed - equally. </p><p>Here's everything you need to know about paying taxes on dividends.</p><h2>How are dividends taxed?</h2><p>A variety of unearned or passive income (as opposed to income from your work or job), dividends are subject to both federal and state taxes. For tax purposes, dividends are classified as either qualified or unqualified, depending on how long you hold the underlying shares in a US corporation or a qualifying foreign corporation.</p><p>What's the difference? Qualified dividends meet a special holding period. That means you owned the stock issuing them for at least 60 days during the 121-day period that started 60 days before the ex-dividend date. The ex-dividend date is the day <em>after</em> the cut-off date (aka the "record date") the company uses to determine which shareholders are eligible to receive the dividend.</p><p>Yeah, that definition is pretty confusing. So here's a real-life example, sort of a timeline. </p><ul><li>Say you purchased 100 shares of IBM stock on March 1, 2020.</li><li>On April 28, IBM's board of directors announced a dividend of $1.63 per share to stockholders of record.</li><li>They set the record date as May 8, 2020. So the ex-dividend date was May 9, 2020.</li><li>Since you purchased the shares more than 60 days prior to the ex-dividend date (May 9, 2020), the $163 in dividends your shares earned you are qualified. On the other hand, if you'd purchased shares on April 1, you would have owned the stock for fewer than 60 days, and the dividends would be unqualified.</li></ul><h2><strong>How do I know if my dividends are qualified or not?</strong></h2><p><strong>Don't worry; you don't have to keep track of ex-dividend dates and figure out which dividends are and aren't qualified on your own. Around January 31 of each year, you should receive Form 1099-DIV from any company or brokerage that paid you at least $10 in dividends or other distributions during the prior year. Your total dividends are shown in Box 1a of Form 1099-DIV, and qualified dividends appear in Box 1b.</strong></p><h2>How much tax do you pay on dividends?</h2><p>Why do dividends being qualified or unqualified matter? Because it affects the amount of tax you pay on them. </p><p>Unqualified dividends are taxed at your ordinary income tax rate - the same rate that applies to your wages or self-employment income. So, if you fall into the 32% tax bracket, you'll pay a 32% tax rate on all your unqualified dividends, also known as ordinary dividends.</p><p>Qualified dividends get preferential treatment. You pay the same tax rate on qualified dividends as you do on long-term <a href="https://www.businessinsider.com/what-are-capital-gains" target="_blank" rel="noopener">capital gains</a>. Depending on your tax bracket, this rate can be a lot lower than your ordinary income rate.</p><p>The exact rate you pay depends on your filing status and total taxable income for the year.</p><div type="image" title="capital gains 06" height="4689" width="5001" msid="80698551" hostid="261"></div><p>Returning to the IBM example above, let's assume you fall into the 32% tax bracket for ordinary income and the 15% tax bracket for long-term capital gains.</p><p>If your IBM dividends are unqualified, you'll pay roughly $52 in taxes on your $163 of dividends. But if those dividends are eligible for qualified tax treatment, you'll pay only $24 in taxes.</p><h2>How can you avoid paying taxes on dividends?</h2><p>There are a few legitimate strategies for avoiding or at least minimizing the taxes you pay on dividend income.</p><ul><li><strong>Stay in a lower tax bracket</strong>. Single taxpayers with taxable income of $40,000 or less in 2020 ($40,400 or less for 2021) qualify for the 0% tax rate on qualified dividends. Those income limits are doubled for married couples filing jointly. If you can take advantage of tax deductions that reduce your income below those amounts, you can avoid paying taxes on qualified dividends, though not unqualified dividends.</li><li><strong>Invest in tax-exempt accounts</strong>. Invest in stocks, <a href="https://www.businessinsider.com/etf-vs-mutual-fund">mutual funds, and EFTs</a> within a Roth IRA or Roth 401(k). Any dividends earned in these accounts are tax-free, as long as you obey the withdrawal rules.</li><li><strong>Invest in education</strong>-<strong>oriented accounts</strong>. When you invest within a <a href="https://www.businessinsider.com/what-is-a-529-plan" target="_blank" rel="noopener">529 plan</a> or Coverdell education savings account, all dividends earned in the account are tax-free, as long as withdrawals are used for qualified education expenses.</li><li><strong>Invest in tax-deferred accounts</strong>. Traditional IRAs and 401(k)s are tax-deferred, meaning you don't pay taxes on earnings until you withdraw the money in retirement.</li><li><strong>Don't churn.</strong> Try not to sell stocks within the 60-day holding period, so any dividends will be qualified for the low capital gains rates. </li><li><strong>Invest in companies that don't pay dividends</strong>. Young, rapidly growing companies often reinvest all profits to fuel growth rather than paying dividends to shareholders. You won't earn any quarterly income from their stock, true. But if the firm flourishes and its stock price rises, you can sell your shares at a gain and pay long-term capital gains rates on the profits as long as you owned the stock for more than a year.</li></ul><p><strong>Keep in mind: </strong>You can't avoid taxes by reinvesting your dividends. Dividends are taxable income whether they're received into your account or invested back into the company.</p><h2>The financial takeaway</h2><p>Dividend stocks can be a good way to build wealth and supplement your income, so don't let worries over taxes keep you from investing in dividend-paying stocks. </p><p>Still, by knowing how dividends are taxed, you can do some planning to ensure you pay as little to the IRS as possible. </p><p>Qualified dividends benefit from being taxed at lower <keyword id="173153" type="ORGANIZATION" weightage="60" keywordseo="capital-gains-tax">capital gains tax</keyword> rates. And you may be able to lower the tax bite even more if you keep the high-dividend-payers in tax-advantaged accounts.</p><h2>Related Coverage in <a href="https://www.businessinsider.com/investing-reference" target="_blank" rel="noopener">Investing</a>:</h2><h3><a href="https://www.businessinsider.com/best-college-savings-plans-investments" target="_blank" rel="noopener">What are the best college-savings investments? 5 ways to grow your money for the ever-higher costs of higher education</a></h3><h3><a href="https://www.businessinsider.com/what-is-dividend-yield" target="_blank" rel="noopener">Dividend yield is a key way to evaluate a company and the regular payouts from its stock</a></h3><h3><a href="https://www.businessinsider.com/capital-gains-tax-rates" target="_blank" rel="noopener">Capital gains tax rates: How to calculate them and tips on how to minimize what you owe</a></h3><h3><a href="https://www.businessinsider.com/how-to-invest-in-dividend-stocks" target="_blank" rel="noopener">How to invest in dividend stocks, a low-risk source of investment income</a></h3><h3><a href="https://www.businessinsider.com/interest-income-taxes" target="_blank" rel="noopener">Interest income from your investments is taxable - here's how to calculate what you owe and ways to lower it</a></h3>

Dividends are taxed in different ways - here's how to figure what you owe on your stocks' payouts

<p><strong><div class="KonaFilter image-container display-table"><div><div class="image on-image"><p class="source"><span>Getty</span></p><p class="caption">RBS CEO Ross McEwan</p></div><p></p></div></div></strong></p><ul><li><strong>Royal Bank of Scotland will pay shareholders a dividend for the first time since the financial crisis, the bank announced on Friday.</strong></li><li><strong>Investors will receive an interim dividend of two pence ($0.026) per share, pending the final settlement of a fine from the US Department of Justice.</strong></li><li><strong>RBS achieved an attributable profit of £888 million ($1.15 billion) in the first half of the year.</strong></li><li><strong>RBS shares jumped on the news, gaining around 2% in the first 30 minutes of trading in London.</strong></li></ul><p><br />LONDON - Royal Bank of Scotland has announced plans to pay shareholders a dividend for the first time since the financial crisis as its business continues to return towards normality.</p><p>The bank, which was once the world's biggest, <a href="https://www.rbs.com/rbs/news/2018/08/2018-h1-results.html">said at the release of its financial results for the first half of 2018</a> that will pay an interim dividend of two pence ($0.026) per share, pending the final settlement of a fine from the US Department of Justice relating to the historical sale of mortgage-backed securities. That fine is expected to be in the region of $4.9 billion (£3.8 billion)</p><p>After being bailed out by the British government during the financial crisis, RBS has spent 10 years in partial government ownership and struggled to turn a profit. <a href="http://uk.businessinsider.com/rbs-2017-results-first-profit-since-financial-crisis-2018-2">In February this year, it announced its first profits since the crisis.</a></p><p>The bank remained profitable over the first half of 2018, posting an attributable profit of £888 million ($1.15 billion) over the period between January and June.<br /><br />"We are pleased with the progress we've made in the first half of 2018 and see these as a good set of results in a more uncertain and highly competitive environment," Ross McEwan, the bank's CEO said in a statement.</p><p>"Our sector is undergoing significant change and we are positioning ourselves well to compete. We still have a lot more to do to achieve our ambition of being the best bank for customers in the UK and Republic of Ireland. However, with our major legacy issues largely behind us, we are able to fully focus on closing this gap."</p><p>McEwan was brought in as CEO in October 2013 and has said he will leave the bank once the worst of its post-crisis legacy is fixed.</p><p>RBS is currently around 62% owned by the British taxpayer, down from more than 70% earlier in the year.</p><p>Shares jumped on the announcement, gaining around 2.5% in early morning trade. This reflects the increased attractiveness of the stock now that the bank is once again paying a dividend:</p><p><div class="KonaFilter image-container display-table click-to-enlarge"><div><div class="image on-image"><a title_source="Investing.com" title_caption="" class="zoomin" href="https://static-ssl.businessinsider.com/image/5b64041089c8a11c008b4c79-960/screen shot 2018-08-03 at 082716.png"><span class="sprites click-to-enlarge-icon" title="Click to enlarge"></span></a><p class="source"><span>Investing.com</span></p></div><p></p></div></div>Earlier in the week, <a href="https://www.businessinsider.com/barclays-q2-results-profits-popped-by-44-2018-8">Barclays announced a 44% rise in second-quarter profits</a>, buoyed by its investment bank, and Lloyds booked a 23% rise in first-half profits.</p>    <div class="margin-top">        <h3>NOW WATCH: <a href="https://www.businessinsider.com/cigna-ceo-express-scripts-merger-and-problem-with-healthcare-2018-7">The CEO of one of the largest health insurers in the US explains the problem with healthcare in America</a></h3>        <div>                    </div>    </div>

RBS will pay a dividend for the first time since the financial crisis

<ul class="summary-list"><li>The ex-<keyword id="11911187" type="UNKNOWN" weightage="60" keywordseo="dividend" source="Orion">dividend</keyword> date, or ex-date, marks the cutoff period in which you can purchase a stock to receive the upcoming dividend payment.</li><li>If you own shares the day before the ex-dividend date, you receive the next dividend payment. If not you purchase the stock on the ex-date or after, the seller gets the dividend.</li><li>Investors use the ex-date to decide between receiving the upcoming dividend at full share price or giving up the dividend for a discounted share price.</li></ul><p>Investors looking for ongoing income from their investments often buy stock in <a href="https://www.businessinsider.com/how-to-invest-in-dividend-stocks" target="_blank" rel="noopener">dividend-paying companies</a> for the earnings distributions they receive. To maximize profits, these investors must pay close attention to several important dates, one of which is the ex-dividend date.</p><p>When a company declares a <a href="https://www.businessinsider.com/what-is-a-dividend" target="_blank" rel="noopener">dividend</a>, a process is set in motion with precise rules about how those dividends will be disbursed and to whom. Here we will learn about that process and the role played by the ex-dividend date. </p><h2><strong>What is an ex-dividend date? </strong></h2><p>The ex-dividend date of a stock determines who receives an upcoming dividend payment. If you own shares of a dividend-paying stock the day before the ex-dividend date, you're entitled to the next dividend payment. If the stock is bought on the ex-date or any time after, the dividend payment is collected by the seller. </p><p>Another very similar-sounding term you might hear is ex-dividend. This is not the same as the ex-dividend date.</p><p>Ex-dividend refers to a stock that trades without the value of the next dividend payment. A stock is ex-dividend if it trades on or after the ex-dividend date. If you buy a stock after it has gone ex-dividend, you will own the stock but will not get the next dividend payment for that stock. Instead, the payment will go to the person who sold you the stock.</p><p><strong>Quick tip:</strong> When you buy a stock that has gone ex-dividend, you only lose the next dividend payment. In addition, the price of the ex-dividend stock will typically drop by the amount of the missed dividend so you will be buying the stock at a discount.</p><h3>Why is it important?</h3><p>Dividend investing is a system that involves buying <keyword id="11893878" type="UNKNOWN" weightage="60" keywordseo="stocks" source="Orion">stocks</keyword> that pay a portion of the profit the company has earned on a regular basis, called dividends. Dividend investors typically use a <a href="https://www.businessinsider.com/buy-and-hold" target="_blank" rel="noopener">buy-and-hold strategy</a> in which they buy reliable stocks in solid companies and collect the dividends over a long period, buying or selling only when they want to add new stocks or dump stocks that are no longer performing.</p><p>The ex-dividend date is important to dividend investors because of the role it plays in determining who gets the next dividend payment. If you own a stock and want to make sure you get the next dividend payment, don't sell the stock until the ex-dividend date or later. If you buy a stock and want to make sure you get the next dividend payment, buy the stock before the ex-dividend date.</p><h2><strong>How ex-dividend dates work </strong></h2><p>The process begins when a company declares it will pay a dividend. As part of that declaration, the company states how much it will pay (dividend) along with four important dates including the declaration date, ex-dividend date, record date, and payment date.</p><p>But first: To completely understand the role of the ex-dividend date you should know four dates that are part of the dividend payment process. The <a href="https://www.businessinsider.com/securities-and-exchange-commission" target="_blank" rel="noopener">US Securities and Exchange Commission</a> (SEC) <a href="https://www.sec.gov/rules/final/2017/34-80295.pdf" target="_blank" rel="noopener">regulates the dates</a> that relate to dividend payments.</p><ul><li><strong>Declaration date:</strong> This is the date the company declares it will pay a dividend, how much it will pay, when it will pay it and, importantly, the ex-dividend date. By regulation, the declaration date must be at least 10 business days before the record date.</li><li><strong>Ex-dividend date:</strong> This is the cutoff date to decide who gets the next dividend payment. If you own the stock one business day before the ex-dividend date, you get the payment. If somebody else owns the stock on that date, they get the payment. Two methods are used to determine the ex-dividend date, which we cover below.</li><li><strong>Record date:</strong> This date is set by the company as the date it will determine who the stockholders of record are. These are the stockholders who will receive the upcoming dividend payment.</li><li><strong>Payment date:</strong> This is the day the company pays out the dividend.</li><li><strong>Settlement date:</strong> This is the date you actually own the stock if a buyer or receive payment if a seller. Stock settlement typically happens two business days after the order is placed.</li></ul><p><strong>Quick tip:</strong> Companies that pay dividends often do so on a quarterly basis.</p><p>The ex-dividend date acts as a buffer to make sure there's enough time to complete a transfer of stock ownership from the seller to the buyer. This is why in order to receive the upcoming dividend payment you must buy the stock before the ex-dividend date.</p><h3><strong>Two ways the ex-dividend date is determined</strong></h3><p>If the dividends or distributions are less than 25% of the value of the stock, the ex-dividend date is one business day before the record date and the stock price is adjusted down on the ex-dividend date to reflect the amount of the dividend.</p><p>The second method, for dividends or distributions that are 25% or greater of the value of the stock, sets the ex-dividend date as the first business day after the payment date, making that the date the stock goes ex-dividend with the price adjusted down. In this case, the regulation provides that the owner of record who sells the stock before the ex-dividend date has to relinquish the dividend to the buyer. This is to prevent the seller from receiving the value of the dividend twice.</p><p>Let's take a look at two examples of how the ex-dividend date is used with the following dates:</p><table style="border-collapse: collapse; width: 100%; height: 44px;" border="1"><tbody><tr style="height: 22px;"><td style="width: 25%; height: 22px;"><strong>Declaration date</strong></td><td style="width: 25%; height: 22px;"><strong>Ex-dividend date</strong></td><td style="width: 25%; height: 22px;"><strong>Record date</strong></td><td style="width: 25%; height: 22px;"><strong>Payment date</strong></td></tr><tr style="height: 22px;"><td style="width: 25%; height: 22px;"><strong>7/29/2021</strong></td><td style="width: 25%; height: 22px;">8/12/2021</td><td style="width: 25%; height: 22px;">8/13/2021</td><td style="width: 25%; height: 22px;">9/17/2021</td></tr></tbody></table><p>On July 29, 2021, Company XYZ announced a $2 quarterly dividend payout to shareholders. The company declared a dividend payment date of September 17, 2021. The date of record for shareholders on the company's books is August 13, 2021. This means the ex-dividend date, one business day before the record date, will be August 12, 2021.</p><p><strong>Example 1:</strong> On August 11, 2021, you purchase 100 shares of XYZ stock at $50 for $5,000. Since you initiated the purchase before the ex-dividend date, and assuming settlement occurs two business days later, you'll be the shareholder of record on the record date (8/13/2021) and you will receive a dividend payment of $200 ($2 x 100 shares) on 9/17/2021.</p><p><strong>Example 2:</strong> On the other hand, if you wait just one day and initiate the purchase on August 12, 2021, settlement will not occur until Aug. 14, 2021, meaning the person you bought the shares from will be the owner of record on Aug. 13. However, instead of paying $5,000 for the stock you will pay $4,800 ($5,000 - $200) since the stock would be trading ex-dividend.</p><h3><strong>The T+2 settlement</strong></h3><p>The settlement date, the day you actually own the stock, is what determines whether you receive the upcoming dividend as a buyer or a seller. Settlement dates are described as T+1, T+2, T+3, etc. meaning settlement occurs one, two, or three business days after T (i.e., the trade day). </p><p>Currently, stocks settle following the T+2 formula. In order for you as a buyer to receive the dividend, your settlement must occur on or before the record date. It takes 3 days to settle: the day the trade is initiated (T) plus two business days. The second business day is the settlement date.</p><p>T+2 settlement hasn't been around forever. Back when trades were done manually, settlement was T+5. It has been shortened over the years until now stocks use T+2 settlement. Looking ahead, the Depository Trust and Clearing Corporation (DTCC) <a href="https://www.dtcc.com/news/2021/february/24/dtcc-proposes-approach-to-shortening-us-settlement-cycle-to-t1-within-two-years" target="_blank" rel="noopener">is proposing moving the US</a> to T+1 (next day) settlement by 2023.</p><h2>An investing strategy: Dividend capture</h2><p>According to Marc Lichtenfeld, chief income strategist at the Oxford Club, "Dividend capture is a strategy where an investor buys the stock before the ex-dividend date and sells on or right after the ex-dividend date in order to capture the dividend."</p><p>The <a href="https://money.usnews.com/investing/dividends/articles/what-is-a-dividend-capture-investing-strategy" target="_blank" rel="noopener">idea is to purchase the stock, "capture" the dividend</a>, and sell the stock on or after the ex-dividend date at no loss or a slight gain, keeping the dividend as profit. Advocates of dividend capture strategy sometimes use ex-dividend date tracking tools to search for stocks that are going ex-dividend during a specific date range. </p><p>The more advanced tools offer additional information and analysis for a fee. <a href="https://www.nasdaq.com/market-activity/dividends" target="_blank" rel="noopener">There's a tool</a> sponsored by <a href="https://www.businessinsider.com/what-is-nasdaq" target="_blank" rel="noopener">NASDAQ</a> that provides all the basic information, including declaration (announcement) date, ex-dividend date, record date, payable (payment) date, dividend amount, and more for free. </p><p>When it comes to actually using dividend capture as a strategy, Lichtenfeld is not much of a fan. "The strategy doesn't work," he says. "If it did, large institutional investors would do it consistently and capture dividends every day."</p><p>Lichtenfeld says the strategy doesn't work because of that rule requiring stocks to go down by the amount of the dividend on the ex-dividend date. This, Lichtenfeld believes, creates "too much risk that the stock would fall as much as the dividend paid or more."</p><p>This risk analysis doesn't stop others from using the strategy to try to capture dividends as a way to make money. Capture advocates count on other factors to keep the price of the stock from falling, including positive earnings, economic factors, analysts expectations - and even rumors.</p><h2><strong>The financial takeaway</strong></h2><p>Since the ex-dividend date determines who gets the upcoming dividend based on who owns the shares the business day before that date, it's one of the most important dates to track for dividend investors.</p><p>Some investors employ the use of dividend capture, which is a strategy where an investor buys and holds a stock just long enough to get the next dividend, then sell the stock quickly for no loss. This is risky since the price of the stock is automatically reduced by the upcoming dividend.</p><p>Remember that if you wait until the ex-date or later to buy stock, you will get it cheaper, just without the next dividend. Some investors prefer the discount more than they do missing one dividend payment.</p><a data-type="611143fb0d5b755b492d74c3">Stock trading: How to get started for beginners</a><a data-type="610d8fc9bd6912250a75ef54">What are fractional shares and how do they work?</a><a data-type="60f8953c04eb592d3d6a5066">Understanding buy-and-hold investing - a long-term strategy that Warren Buffett swears by</a><a data-type="60ec7aa704eb592fca2b3d8b">A company's earnings per share can help you gauge its profitability - here's how you calculate it</a>

Ex-dividend date: Why it's important to know when investing in dividend stocks

<ul class="summary-list"><li>A <keyword id="6368159" type="UNKNOWN" weightage="60" keywordseo="stock">stock</keyword> is an investment that represents a unit of ownership in a company.</li><li>Capital appreciation and dividends are the two primary ways that shareholders earn returns on their stock investments.</li><li>By investing in stock funds or buying fractional shares of stocks, investors can build diversified stock portfolios.</li></ul><p>A stock is an investment in a company. But unlike <a href="https://www.businessinsider.com/private-equity-investment" target="_blank" rel="noopener">private equity investments</a>, which are typically reserved for <a href="https://www.businessinsider.com/accredited-investor" target="_blank" rel="noopener">accredited investors</a>, thousands of stocks are available for anyone to buy and sell on public exchanges. </p><p>For this reason, stock investments are some of the most well-known and popular ways to invest and build wealth. </p><p>Let's take a closer look at what a stock is, how stock investing works, and the ways that stock investors can make money.</p><h2><strong>What is a stock?</strong></h2><p>A stock, also known as equity, is a security that represents a fractional share of ownership in a company. When you purchase a stock from a company, you become a shareholder, and the small piece you own is called a share. </p><p>Investors buy and own stocks in hopes that the company will succeed. When the company does well, its stock owners share in those profits. </p><p>Conversely, shareholders can also expect their returns to be diminished if the company underperforms or declines. And in the worst-case scenario, a stock owner's shares could become worthless if the company was to go bankrupt.</p><h2><strong>How do stocks work?</strong></h2><p>Companies can issue their stock shares either privately or publicly. While private shares are typically only available to accredited investors, accreditation isn't required to invest in stocks that are traded on public exchanges such as the <a href="https://www.businessinsider.com/new-york-stock-exchange" target="_blank" rel="noopener">New York Stock Exchange</a> or <a href="https://www.businessinsider.com/what-is-nasdaq" target="_blank" rel="noopener">Nasdaq</a>.</p><p>Private companies "go public" to raise money for business initiatives such as launching new products or services expanding its reach. They do this through <a href="https://www.businessinsider.com/what-is-ipo" target="_blank" rel="noopener">initial public offerings</a> (IPOs), where companies are required to meet SEC financial transparency requirements and share price is typically decided by an investment bank. Once the IPO has been issued and the stock begins trading, supply and demand dynamics will move its price up or down.</p><h3>How to buy and sell stocks</h3><p>Investors can buy and sell public stocks by opening an account with a stock broker. There are now a large number of brokers who <a href="https://www.businessinsider.com/personal-finance/best-online-brokers-for-free-stock-trading" target="_blank" rel="noopener">don't charge commissions</a> for stock trades and allow clients to <a href="https://www.businessinsider.com/explainer-what-is-fractional-stock-trading-and-who-offers-it-2020-8" target="_blank" rel="noopener">buy fractional shares of stocks</a>.</p><p>Investors can instantly diversify their stock holdings by investing in stock funds (<a href="https://www.businessinsider.com/personal-finance/what-is-an-etf-exchange-traded-fund" target="_blank" rel="noopener">ETFs</a> or mutual funds), which allows you to spread your money across a variety of stocks. Some funds are actively managed while others track benchmark <a href="https://www.businessinsider.com/what-is-a-stock-market-index" target="_blank" rel="noopener">market indexes</a>, such as the <a href="https://www.businessinsider.com/what-is-the-sp-500" target="_blank" rel="noopener">S&amp;P 500</a>.</p><p>"Stock picking can be a time-consuming activity if done correctly. Therefore, I always advise [investors] to buy an index or ETF such as one on the S&amp;P 500, like <a href="https://markets.businessinsider.com/etfs/vanguard-sp-500-etf-us9229083632" target="_blank" rel="noopener">VOO</a>, or on any other sector of interest," says Shanka Jayasinha, CIO of <a href="https://shanka.org/sj-private-equity" target="_blank" rel="noopener">S&amp;J Private Equity</a>.</p><p>Note that ETFs and mutual funds charge an annual management fee, referred to as the fund's <a href="https://www.businessinsider.com/what-is-expense-ratio" target="_blank" rel="noopener">expense ratio</a>. It's important to know what you're paying in fund fees as high expense ratios will eat into your overall returns.</p><h3>How do stocks offer returns?</h3><p>There are two primary ways that shareholders can earn returns on their investments: capital gains and dividends.</p><p>Capital gains are the profits from when you sell a stock. This happens when you sell it for more than you paid for it.</p><p><strong>Capital gains example:</strong> Let's say that you bought 100 shares of ABC company at $50 per share for a $5,000 investment. Ten years later, ABC shares are trading at $100. If you sold your shares at that moment, you'd receive $10,000. You'd profit $5,000 for an annualized return of 7.18%.</p><p><a href="https://www.businessinsider.com/what-is-a-dividend" target="_blank" rel="noopener">Dividends</a> are regular payments to shareholders. Each company can set its own dividend schedule but quarterly payouts are most common.</p><p><strong>Dividends example:</strong> You purchase 50 shares of XYZ stock which pays a quarterly dividend of $1. In this example, you'd receive $50 per quarter and $200 per year in annual dividend payments from the company. If the company raised its quarterly dividend to $1.10, your quarterly payout would increase to $55 ($50 x $1.10 = $55) and your annual dividend income would grow to $220.</p><p>Dividends give investors a means of realizing income without having to sell any of their shares - even during years that the stock price declines. Because of this, dividend-paying stocks are often very attractive to investors who are in or near retirement.</p><h3>Stock investing vs. stock trading</h3><p>In contrast to <a href="https://www.businessinsider.com/personal-finance/what-is-buy-and-hold-investing-strategy" target="_blank" rel="noopener">buy-and-hold investors</a>, active traders try to make a profit on short-term fluctuations in a stock's price. While investors may focus heavily on a company's fundamental and long-term prospects, traders tend to rely more on news events and technical analysis to inform their decisions.</p>Related Article Module: Trading and investing are two approaches to playing the <keyword id="6357440" type="DEFINITION" weightage="60" keywordseo="Stock-Market">stock market</keyword> that bring their own benefits and risks<p>If you have the time that it requires to research and manage trades, trading can offer faster returns than investing. However, investing is the way to go if you want to earn passive income on your stock holdings. And if you do decide to dabble in trading, it's important to think through your trade plan before taking any position and stick with it no matter what.</p><h2><strong>Types of stock</strong></h2><p>Stocks can be classified in a variety of ways. Below we break down a few of the major types and explain their differences.</p><h3>Common vs. preferred stocks</h3><p>There are two main types of stocks: common stocks and preferred stocks.</p><ul><li><strong><a href="https://www.businessinsider.com/what-is-common-stock" target="_blank" rel="noopener">Common stock</a>: </strong>As the name suggests, this is the most common type of stock. Common stockholders typically receive quarterly dividends and voting rights. However, those dividends fluctuate and are not guaranteed. </li><li><strong><a href="https://www.businessinsider.com/what-is-preferred-stock" target="_blank" rel="noopener">Preferred stock</a>: </strong>Preferred stocks pay a higher, fixed dividend than common stock, but their share prices don't appreciate as much as common shares do. Preferred stockholders also get paid those dividends before common shareholders, even in the event of bankruptcy. </li></ul><p>"If you buy 100 shares of Coca Cola Company stock, you're most likely buying the common stock," says <a href="https://www.creighton.edu/faculty-directory-profile/2010/robert-johnson" target="_blank" rel="noopener">Robert Johnson</a>, a professor of <keyword id="25455" type="ORGANIZATION" weightage="100" keywordseo="finance">finance</keyword> at Creighton University. "Common stock, at most companies, accounts for the vast majority of the shares outstanding."</p><p>Holders of common stock also "elect the board of directors and vote on corporate issues" explains Anthony Denier, CEO of the trading platform <a href="https://www.webull.com/" target="_blank" rel="noopener">Webull</a>. "The disadvantage is that in bankruptcy proceedings, common shareholders are last in line for the company's assets." </p><p>Denier adds that preferred stock offers "stable dividends" and the yields are often "higher than the same company's common stock dividends." And he notes that if the company is running short on cash, "preferred shareholders receive their dividends before common shareholders." </p><h3>Class A vs. Class B shares</h3><p>In some cases, companies may sell separate Class A and Class B shares. The major difference between the two is typically that Class B shares will have more voting rights. </p><p>For example, Coke common stock shareholders receive one vote per share, while Class B shareholders receive 20 votes per share. Typically, companies create share classes in this way because they want the voting power to remain with a certain group.</p><h3>Other stock categories and classifications</h3><p>Let's say that you're an average retail investor who only has access to common stock. You can filter your stock search in a variety of ways such as by size, industry, style, or location. </p><p>One option is to look at the company's <a href="https://www.businessinsider.com/what-is-market-cap" target="_blank" rel="noopener">market capitalization</a> - or in other words, its size. Some investors may only want to focus on well-established, large-cap companies. Others may want to include small-cap and mid-cap companies which, while often more volatile, could also offer outsized returns.</p><p>Companies can also be grouped by industry. Tech, industrials, financials, and consumer staples are just a few industry sector examples. Investing in stocks from a variety of industries helps to improve your portfolio's diversity.</p><p>With style-driven investing, you look for stocks that fit in with a particular investing strategy such as <a href="https://www.businessinsider.com/growth-investing-definition-strategies" target="_blank" rel="noopener">growth</a>, <a href="https://www.businessinsider.com/value-investing-definition" target="_blank" rel="noopener">value</a>, or <a href="https://www.businessinsider.com/how-to-invest-in-dividend-stocks" target="_blank" rel="noopener">dividend investing</a>. And, finally, stocks can be classified by geography. For example, U.S investors may want to broaden their exposure to emerging markets by investing in foreign-company stocks.</p><h2><strong>How to make money investing in stocks</strong></h2><p>When investors are able to take advantage of compounding returns over many years, their profits can increase exponentially. That's why <em>time in the market</em>, rather than <em>perfect timing</em>, is likely to be most important to your success.</p><p>"Time is the greatest ally of the investor because of the <a href="https://www.businessinsider.com/what-is-compound-interest" target="_blank" rel="noopener">'magic' of compound interest,"</a> Johnson says. </p><p>With this in mind, Johnson recommends that investors "begin investing in a low-fee, diversified equity index fund and continue to invest consistently whether the market is up, down, or sideways." </p><p>According to Goldman Sachs, US stocks have shown an <a href="https://www.businessinsider.com/personal-finance/average-stock-market-return" target="_blank" rel="noopener">average 10-year</a> return of 9.2% in the past 140 years. But this upward movement hasn't happened along a straight line.</p><p>According to the <a href="https://intelligent.schwab.com/article/stock-market-corrections-not-uncommon" target="_blank" rel="noopener">Schwab Center for Financial Research</a>, the market suffered intra-year setbacks of 10%+ in 11 of the past 20 years, demonstrating the relatively high short-term risk of stock investing. Yet, it finished in positive territory in all but five of those years.</p><h2><strong>The financial takeaway</strong></h2><p>A stock gives an investor a small ownership share of a company and the stock's returns will generally be based on the company's performance. Investing in stocks is a common way for investors to build wealth for themselves.</p><p>However, there are no guarantees. Whenever a public company fails, it's stock investors are likely to suffer as well. But the more stocks you own, the lower your risk of taking a big portfolio hit as a result of one wrong stock pick. </p><p>Thankfully, you don't need a huge account balance to <a href="https://www.businessinsider.com/how-to-diversify-portfolio" target="_blank" rel="noopener">build a diversified stock portfolio</a> with your broker. Through the use of ETFs, mutual funds, or fractional shares, it's easy to invest in dozens or hundreds of stocks with minimal capital. </p><a data-type="603d0928507cd77b043e1cac">How many stocks should you own in your portfolio? Why there's no single 'right' answer</a><a data-type="5fe37c75bca41b4277771c27">A guide to stock market indexes: What they measure and how they can guide your investing</a><a data-type="605b960fa7e94b031c02bd35">What is a stock market correction? How to make sense of sudden drops in the market</a><a data-type="6001ce12c645d70cca75252c">A growth stock is a company expected to rise faster than the overall market, offering bigger gains for investors who don't mind risk</a>

What is stock? Learn the basics of investing in a public company

<ul class="summary-list"><li><keyword id="896799" type="PERSON" weightage="60" keywordseo="dividend-stocks">Dividend stocks</keyword> are shares of established companies that offer a predictable stream of income in the form of dividend payments.</li><li>There are three common metrics to evaluate dividend stocks: Dividend yield, dividend payout ratio, and dividend payout growth.</li><li>Investors look to dividend-paying stocks to generate steady income, or to build more wealth by reinvesting the dividend payments. </li></ul><p>There are two main ways to make money in the stock market. One is to buy stocks and sell them later for a profit, or <a href="https://www.businessinsider.com/what-are-capital-gains" target="_blank" rel="noopener">capital gain</a>. The other is to buy stocks and reap income a little at a time via the <keyword id="6500564" type="UNKNOWN" weightage="60" keywordseo="Dividends">dividends</keyword> your shares pay. </p><p>Technically, any stock that pays a dividend - a piece of the company's profits - is a dividend stock. In common parlance, though, the term refers to a stock whose shares offer a steady, rich income stream, either to be used now or to be reinvested back into the company. </p><p>But how do you determine what's a "good" dividend stock? There are several ways to evaluate them. </p><h2>Dividend stock basics</h2><p><a href="https://www.businessinsider.com/what-is-a-dividend" target="_blank" rel="noopener">Dividends are small per-share income payments</a> of a company's earnings or profits to stockholders. The higher the payment and the more shares you own, the more income you receive. The more profitable the company is, the higher the dividend - in most cases.</p><p>The best dividend stocks are also often known as <a href="https://www.businessinsider.com/what-are-blue-chip-stocks" target="_blank" rel="noopener">blue chips</a>, representing large, solid, well-established companies that pay the same or similar annual dividend year after year. Some examples include <a href="https://markets.businessinsider.com/stocks/gis-stock" target="_blank" rel="noopener">General Mills, Inc. (GIS)</a>, <a href="https://markets.businessinsider.com/stocks/abbv-stock" target="_blank" rel="noopener">ABBVIE Inc. (ABBV)</a>, and <a href="https://markets.businessinsider.com/stocks/duk-stock" target="_blank" rel="noopener">Duke Energy Corp. (DUK)</a>.</p><p>Dividend stocks often overlap with another equities type: <a href="https://www.businessinsider.com/what-are-defensive-stocks" target="_blank" rel="noopener">defensive stocks</a>. These are companies who perform well in good economic times and bad - both <a href="https://www.businessinsider.com/what-is-a-bull-market" target="_blank" rel="noopener">bull</a> and <a href="https://www.businessinsider.com/what-is-a-bear-market" target="_blank" rel="noopener">bear markets</a>.</p><p>Dividend stocks are most often contrasted with growth stocks. These usually represent small but fast-growing companies that offer great appreciation potential - down the road. In the meantime, they're plowing most of their profits back into production and operations. So their shares don't offer much (if any) of a dividend payout. </p><p>That being said, not all dividend stocks come from venerable, giant corporations, and not all growth companies are young. Perhaps the most famous case in point is <a href="https://markets.businessinsider.com/stocks/amzn-stock" target="_blank" rel="noopener">Amazon (AMZN)</a>. Although huge, an industry leader, and over 20 years old, Amazon still invests most of its profits in research and development, instead of offering dividends. And its share price continues to rise. So financial analysts still classify it as a growth stock. </p><h2>How to evaluate dividend stocks</h2><p>Evaluation is key to picking dividend stocks that will offer solid income over the long term. Three important metrics can help you choose the best dividend stocks for your portfolio: dividend yield, dividend payout growth rate, and dividend payout ratio.</p><h3><strong>Dividend yield </strong></h3><p>The most important metric is <a href="https://www.businessinsider.com/what-is-dividend-yield" target="_blank" rel="noopener">dividend yield</a>, a ratio expressed as a percentage that shows how much a company pays in dividends relative to its share price. </p><div type="image" title="dividend yield formula" height="809" width="1619" msid="79574759" hostid="261"></div><p>For example, if the annual dividend paid by a company is $5 and the price of a share of stock is $100, the dividend yield would be 5/100 * 100 =<strong> 5%</strong>.</p><p>In most cases, you won't have to calculate the dividend yield for a company. Just check the stock listings page or market index page like this one for <a href="https://markets.businessinsider.com/stocks/t-stock" target="_blank" rel="noopener">AT&amp;T (T)</a>, and scroll down to <em>dividend yield</em>. </p><p><strong>Numbers to look for: </strong>Between 2010 and 2020, the <a href="https://www.multpl.com/s-p-500-dividend-yield/table/by-year" target="_blank" rel="noopener">average S&amp;P 500 dividend yield</a> has been 1.96%. So, historically, a dividend yield between<strong> 2% and 6%</strong> is considered good. Blue-chip stocks, like AT&amp;T, often are even higher. </p><h3><strong>Dividend payout growth  </strong></h3><p>The dividend payout growth, also known as dividend growth rate (DGR), is the average percentage rate of growth a stock's dividend has experienced over a specific period (usually three, five, or 10 years). It's a key metric to help you stay ahead of inflation, which has <a href="https://www.statista.com/statistics/244983/projected-inflation-rate-in-the-united-states/" target="_blank" rel="noopener">averaged 1.67%</a> over the past 10 years.</p><div type="image" title="dividend 02" height="1678" width="5001" msid="79574812" hostid="261"></div><p>For example, if a company's annual dividend this year is $10 and the annual dividend last year was $9, the one-year dividend growth rate would be calculated as follows: 10/9 - 1 * 100 = 11%.</p><p><strong>Numbers to look for:</strong> A DGR of <strong>5% to 9%</strong> is considered good and anything over <strong>10% </strong>very good.</p><h3><strong>Dividend payout ratio </strong></h3><p>Finally, look at the dividend payout ratio, or the percentage of a company's earnings or free cash flow used to cover dividend payments. </p><div type="image" title="dividend 04" height="1641" width="5001" msid="79574735" hostid="261"></div><p>For example, if the annual dividend per share of a company is $5 and earnings per share (EPS) are $10, the payout ratio would be 5/10 * 100 = 50%.</p><p>The payout ratio is important because it tells you whether a company is dedicating too much (or too little) of its free cash flow to dividends. For the S&amp;P 500 between 2010 and 2020, the average dividend payout ratio has been 41%. </p><p><strong>Numbers to look for:</strong></p><ul><li>0% to 35% is the mark of a young company just starting to pay dividends. </li><li>35% to 55% is a sign of a healthy, mature company that has struck balance between dividends and reinvestment.</li><li>55% to 75% would be considered high since more than half of profits are going toward dividends. Note: Slow-growth blue-chip stocks may have a higher payout ratio than younger companies.</li><li>75% to 95% or higher may mean the company is borrowing to pay dividends, a sign a dividend cut or suspension may be in the works.</li></ul><div type="image" title="5WmfS the growth in s p 500 company dividend payouts has been strong in the last decade" height="1110" width="1240" msid="79574704" hostid="261"></div><h2>Other things to consider</h2><p>Before you reject a stock because it doesn't have the "right numbers" on all three metrics, consider how those metrics work with and against each other.</p><h3>Match the metrics to your investing style</h3><p>The relationship between metrics will help you decide if a stock is not only a good dividend stock but whether it's good for you. If you are just starting out, you may prefer a high dividend growth rate, even at the expense of dividend yield or payout ratio. On the other hand, if you are near retirement, growth won't be as important as yield and payout ratio.</p><h3>Dividend yield vs. dividend growth rate</h3><p>A high dividend yield may signal a company that's not destined for a lot of growth. That's because high yield typically comes from established but slow-growing companies, churning out lots of profit. The opposite is also true. If yield is low but DGR is high, you might be in the beginning stages of a company whose stock will pay off down the road. So, the question may be, "Do I want short-term profit or long-term gain?"</p><h3>The role of dividend payout ratio</h3><p>Which brings us to the percentage of earnings being paid out in dividends. The reason 35% to 55% is considered optimum is that it helps guarantee the company isn't over-extending itself or (shades of horror) borrowing money to pay dividends. But, as with both DY and DGR, circumstances matter.</p><p>A DPR of 60% or even 70% may be perfectly reasonable for a solid-slow growing company with no need for a lot of R&amp;D or a company on the cusp of new income. Likewise, a dividend payout ratio under 35%, especially if the DGR is high might be a signal you could get in on the ground floor of a great opportunity.</p><h2>Advantages and disadvantages of dividend stocks</h2><p>As with any strategy, there are advantages and disadvantages to dividend investing. Your age, investment goals, and tolerance for risk will help you decide whether the upside outweighs the downside. </p><h3>Pros of dividend stocks</h3><ul><li>Reliable income stream</li><li>Less volatile than other types of stocks</li><li>Potential double payoff: dividends now, appreciation later</li></ul><h3>Cons of dividend stocks</h3><ul><li>Dividend amount not guaranteed</li><li>Less growth than other stock types</li><li>Limited diversity: most stocks in old-line industries</li></ul><h2>The financial takeaway</h2><p>Dividend stocks are those that offer the right combination of yield, growth, and payout ratio. </p><p>In addition to the obvious benefit - cash - investors like dividend stocks for two main reasons:</p><ol><li>They represent safe, well-established companies with a track record of sharing profit with stockholders.</li><li>They require very little maintenance because, once you've picked them, dividend stocks are mostly "buy and hold."</li></ol><p>Dividend stocks appeal especially to older investors because of the regular, paycheck-like income stream. However, whether you are just starting your investment journey or nearing retirement, part of your portfolio can benefit from owning dividend stocks, as a good <a href="https://www.businessinsider.com/what-is-diversification">diversification</a> technique.</p><h2>Related Coverage in <a href="https://www.businessinsider.com/investing-reference" target="_blank" rel="noopener">Investing</a>:</h2><h3><a href="https://www.businessinsider.com/what-is-common-stock" target="_blank" rel="noopener">What is common stock? The most typical way to invest in a company and profit from its growth</a></h3><h3><a href="https://www.businessinsider.com/how-to-diversify-portfolio" target="_blank" rel="noopener">How to diversify your portfolio to limit losses and guard against risk</a></h3><h3><a href="https://www.businessinsider.com/growth-investing-definition-strategies" target="_blank" rel="noopener">What is growth investing? A strategy that focuses on high-growth companies in hopes for significant investment returns</a></h3><h3><a href="https://www.businessinsider.com/passive-investing" target="_blank" rel="noopener">Passive investing is a long-term wealth-building strategy all investors should know - here's how it works</a></h3><h3><a href="https://www.businessinsider.com/value-investing-definition" target="_blank" rel="noopener">Value investing is a bargain-hunting strategy that targets low-performing but quality stocks, aiming to profit when their prices rise </a></h3>

How to invest in dividend stocks, a low-risk source of investment income

<p><div class="image-container float_right"><div class="image"><p class="source"><a href="http://i.imgur.com/XaiUx.gif">Imgur</a></p></div></div><strong><em>FA Insights is a daily newsletter from Business Insider that delivers the top news and commentary for financial advisors.</em></strong></p>
<p><strong><a href="http://www.ft.com/intl/cms/s/0/53e40c80-73c4-11e3-beeb-00144feabdc0.html?siteedition=intl#axzz2pHDB9T3w">Investors Are Throwing Money At One Fund Manager's Inflation Bet</a> (Financial Times) </strong></p>
<p>Michael Aronstein's Mainstay Marketfield fund has been drawing a lot of attention after it quadrupled to $18 billion in the last twelve months. Aronstein thinks inflation is bound to return and markets are missing early signs. And investors have given him a vote of confidence by putting billions on his bet that central banks will wait too long to end their loose monetary policies, reports Stephen Foley at the Financial Times. "They never fail to make that error," Aronstein told Foley "because they're structured as bureaucracies and they have to wait until they have enough evidence to convince everybody in the room."</p>
<p>The fund has done well because it "protected investors from the worst of the financial crisis," reports Foley, and because "riding a wave of interest in so-called alternative mutual funds, which mimic hedge funds in giving their managers wide latitude to invest as they see fit, including by taking negative bets as well as positive ones - something that is instrumental in surviving a bear market."<strong><br /></strong></p>
<p><strong><a href="http://www.sungardeninvestment.com/hedged-dividend-investing-the-debate-starts/">What Traditional Investors Are Getting Wrong About Hedged Dividend Investing</a> (Sungarden Investment Research)</strong></p>
<p>Robert Isbitts at Sungarden Investment thinks he has a strategy to help fight the retirement income crisis facing retirees as they realize the bond market has changed. Isbitts is talking about a strategy based on hedged dividend investing. "That is, we aim to achieve a portfolio income yield of 3% over the S&amp;P 500 (or about 5% yield in today's market) not with high quality bonds, but via a combination of individual stocks, hedging securities and possibly some income-oriented ETFs."</p>
<p>The strategy sparked some criticism from those that stick to more traditional   investment strategies. "We don't believe that a "moderate risk" investor should stay in the same place all of the time. Market conditions create reasons to tilt one way or the other. In EXTREME cases (2008 decline/2009 rebound) we want to give ourselves the flexibility to go another 15% in either direction, or 20 (in the case of a 2008 scenario) or 80 (in the case of a 2009 scenario)." </p>
<p>"When modern portfolio theorists …rebalance their clients' accounts, I have seen this is often done AFTER a major change has occurred in the market. So, if stocks lose a ton of money, buy more stocks and sell bonds. BUT, that assumes that 1. the client has stuck around long enough to endure the stock decline (whereas a hedged investor feels pretty comfy) and 2. that moving into bonds at that point is not a suicide mission. Look at the recent market activity (2012-2013): stocks have roared, bonds have petered out and yield very little. Is this about the time that MPTers are rebalancing from stocks to bonds? This sure did work for the last 30 years! But now, from today's rates? THAT is our point at Sungarden - past is not prologue."</p>
<p><a href="http://www.businessinsider.com/sp-500-inflection-points-2014-1"><strong>This Nerve-Wracking Stock Market Chart Is Getting Scarier</strong></a><strong> (JPMorgan Funds)</strong><a href="http://www.businessinsider.com/sp-500-inflection-points-2014-1"><strong></strong> </a></p>
<p>In their Q1 presentation on the markets and the economy, David Kelly and the market strategy team at JP Morgan Asset Management, highlight a chart on S&amp;P 500 inflection points. This chart shows the S&amp;P 500 at different inflection points since the late 90s. As valuation are getting more expensive, everyone is guessing at the when the next one will occur.</p>
<p><div class="image-container"><div class="image"><p class="source">JP Morgan Funds</p></div></div></p>
<p><strong><a href="http://www.businessinsider.com/fidelitys-danoff-on-2014-investments-2014-1">Here's How The Manager Of One Of The World's Biggest Mutual Funds Plans To Invest In 2014 </a>(Fidelity Investments)</strong></p>
<p>Despite the run up in stocks, Will Danoff, manager of $108 billion Fidelity Contrafund, sees opportunities in the stock market. In particular he's looking at consumer discretionary and tech stocks. "In the consumer discretionary sector, the fund is focused on companies with strong brands, good business models, and the ability to expand overseas, and companies that are gaining market share and growing earnings."</p>
<p>He's a bit cautious about tech stocks considering the role of disruptive technologies in increasing competition and the large number of IPOs we've seen. But again he says, "the fund has favored growing companies with strong brands and sustainable business models, and those companies that have shown evidence they can migrate profitably to the mobile Web world. Google, Amazon, and Facebook have all been very large positions in the fund."</p>

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