What Does Artificial Intelligence Mean for Businesses?
06/15/23
Blue Chip Partners Quarterly Edge: Q3 2023
07/13/23
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What are qualified dividends?
Qualified dividends are dividend distributions that are eligible for preferential tax treatment. While ordinary dividends are taxed at a rate dependent on an individual’s federal income tax bracket, qualified dividends are taxed at a rate equivalent to that of long-term capital gains, which is lower.
- How can investors reduce the taxes paid on ordinary dividends?
Within taxable accounts, achieving a greater split of income received from qualified dividends relative to ordinary dividends can help reduce an individual’s tax bill. Avoidance of concentration in certain types of investments such as real estate investment trusts (REITs) and master limited partnerships (MLPs) can also ease taxes related to dividends, as dividends paid from these investments are not typically considered qualified. Tax-loss harvesting can provide further benefit, as strategically selling investments that have declined in value can reduce an individual’s overall tax liability.
Finally, asset location should be considered. Generally, it is more tax-efficient to hold investments that are subject to higher tax rates (such as bonds or REITs) in tax-advantaged accounts, while holding securities that exhibit a greater portion of return from capital appreciation or those that distribute qualified dividends in taxable accounts.
- Is it a mistake for investors to analyze a stock based on the type of dividend? If so, what should they do instead?
The type of dividend a stock pays is just one part of the equation. Instead of solely focusing on qualified vs. ordinary dividends, investors should consider expectations for a stock’s after tax total return. Foregoing ownership of a quality business simply due to the classification of its dividends can be detrimental to an individual’s portfolio, as dividends are just one component of total return.
Disclaimer:
Expressions of opinion are as of this date and are subject to change without notice. Any information provided is not a complete summary or statement of all available data necessary for making an investment decision and does not constitute a recommendation to buy, hold, or sell any security. There are limitations associated with the use of any method of securities analysis. The information has been obtained from sources considered to be reliable, but we do not guarantee that the foregoing material is accurate or complete. Every investor's situation is unique, and you should consider your investment goals, risk tolerance, and time horizon before making any investment. Prior to making an investment decision, please consult with your financial advisor about your individual situation. Past performance does not guarantee future results. Investing involves risk, and you may incur a profit or loss regardless of strategy selected. There is no guarantee that any statements, opinions, or forecasts provided herein will prove to be correct. Dividends are not guaranteed and must be approved by the company Board of Directors. Indices are included for informational purposes only; investors cannot invest directly in any index. Please note, changes in tax laws or regulations may occur at any time and could substantially impact your situation. While we are familiar with the tax provisions of the issues presented herein, as Financial Advisors of Blue Chip Partners, Inc. we are not qualified to render advice on tax or legal matters. You should discuss any tax or legal matters with the appropriate professional. Image credit/ Getty Images.
