Informed Dividend Investor – First Quarter 2024

As we proceed through the new year, Tax Day will be looming large before we know it. So, we thought now would be a good time to review the nuances of dividend taxation and how a variety of factors can impact how much may be owed to Uncle Sam on dividend income.

Dividends are a percentage of company profits paid, on a per-share basis, to owners of publicly traded stocks, mutual funds, exchange traded funds (ETFs), real estate investment trusts (REITs) and master limited partnerships (MLPs). They are usually paid in cash and deposited directly into the investors account. Sometimes, dividends are paid in the form of new shares of company stock. Regardless of how they are paid, dividends are considered unearned or passive income and are subject to both federal and state income taxes.

For 2023, dividend tax rates vary from 0% to 37% depending on the type of dividend issued and an investors tax bracket. There are two tax categories for dividends… “Qualified” and “Nonqualified” (or ordinary) dividends.

ORDINARY DIVIDENDS:

Dividends that do not meet the criteria to be considered “qualified” are generally taxed as ordinary income, with tax rates between 10% and 37% for 2023. Specific rates are determined by the investor’s filing status and income tax bracket.

QUALIFIED DIVIDENDS:

Dividends that meet the following criteria are considered “Qualified” and will be taxed at capital gains tax rates of 0%, 15% or 20% for 2023:

• The dividend must be issued by a major, publicly traded, U.S. domiciled corporation or qualifying foreign company.
• Minimum holding period for common stocks: an investor must own the dividend paying stock for at least 60 days during the 121-day period beginning 60 days before the “ex-dividend date” (aka “Ex-Date”). The ex-dividend date is the day after the “record date”. An investor must be a shareholder on the record date to be eligible to receive the dividend. If an investor does not hold shares long enough, the dividend may be deemed non-qualified for that investor and subject to higher, ordinary income tax rates. Note: the day that shares are sold is included when counting days of ownership. But the day the shares were bought is not included.
  
  EXAMPLE: in 2023, Microsoft declared a $0.68 dividend per share on March 14th with an Ex-Date on May 17th. If an investor owned shares of Microsoft for a minimum of 61 continuous days between March 19th and July 17th, this dividend may be considered qualified.
• Minimum holding period for preferred stocks: at least 90 days during the 181-day period beginning 90 days before the Ex-Date
• Automatic exemptions: dividends paid from tax-exempt companies, REITs, MLPs and employee stock options and shares associated with hedging strategies are exempt from consideration as qualified dividends. Also, special, one time dividend payments usually do not qualify and dividends paid from money market accounts are considered interest income

2023 Qualified Dividend Tax Rates

Rate	Single	Married Filing Jointly	Married Filing Separately	Head of Household
0%	$0 – $44,625	$0 – $89,250	$0 – $44,625	$0 – $59,750
15%	$44,625.01 – $492,300	$89,250.01 – $553,850	$44,625.01 – $276,900	$59,750.01 – $523,050
20%	> $492,300	> $553,850	> $276,900	> $523,050

Source: U.S. Internal Revenue Service

OTHER CONSIDERATIONS:

• Tracking dividends: each year, any company or brokerage that pays more than $10 in dividends or other distributions to an investor will issue them a Form 1099-DIV that aggregates and defines the payments. Total dividend payments are shown in Box 1a, and qualified dividends appear in Box 1b.
• Dividend income taxes cannot be avoided by reinvesting through a Dividend Reinvestment Program (DRIP).
• Some strategies used to minimize or eliminate taxes on dividend income include:
  • Maintain a lower tax bracket… if a married couple, filing a joint tax return kept their 2023 taxable income under $89,250 they would owe 0% tax on qualified dividends. Their tax on ordinary dividends would be between 10% – 12%. If their taxable income was over $89,250 but less than $553,850, their tax on qualified dividends would only be 15%. The tax on ordinary dividends for this income range is from 22% to as much as 35%.
  • Hold dividend paying securities in tax-exempt and/or tax-deferred accounts such as Roth retirement accounts, education-oriented accounts and/or Traditional IRAs or 401(k)s. Utilizing these types of accounts will allow investors to potentially avoid income tax on all dividends paid or defer that income tax to a later date when funds are withdrawn from the account.
  • Utilize tax-loss harvesting to offset dividend and other ordinary income… investors can usually offset up to $3,000 in ordinary income, including dividend income, with capital losses.

Dividend paying investments are an effective way to grow capital and supplement annual cash flow needs. Like most other types of investment income, dividends are taxable income. However, not all dividends are treated or taxed the same way. Understanding the differences between ordinary and qualified dividends can have a meaningful impact on the amount of taxes owed.

Please note: Dividend Assets Capital does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal or accounting professional before engaging in any transaction(s).

DID YOU KNOW?

• According to Bloomberg data, as of 12/31/2023, 14,185 stocks were listed on U.S Stock Exchanges and domiciled in the U.S.
• Among those stocks, only 1,366 or less than 10% are expected to pay dividends in the next 12 months.
• Among those expected to pay dividends, only 158 companies ,or just over 1% of the listed securities, are projected to deliver dividend growth rates over the next three years at or higher than 10% annually.
• Those 158 companies have an average market capitalization of $55B, an estimated dividend yield for next the 12mo of 1.87%, 37 bps higher than the S&P500 Index indicated yield of 1.49% due to higher anticipated dividend growth.

INVESTMENT PHILOSOPHY… WE BELIEVE DIVIDENDS ARE ONE OF THE BEST INDICATORS OF THE FUTURE PRICE PERFORMANCE OF A STOCK:

• According to the most recent update from Ned Davis Research (12/31/2023), “Dividend Growers and Initiators” have outperformed all other dividend policies as well as the S&P 500® Equal-Weighted Index, continuing to demonstrate the power of compounding dividend growth.

Source: Ned David Research, Inc.© Copyright 2023. Further distribution prohibited without prior permission. All Rights Reserved.
See NDR Disclaimer at www.ndr.com/copyright.html. For data vendor disclaimers refer to www.ndr.com/vendorinfo/
Returns based on the monthly, equal-weighted geometric average of total returns of the S&P 500® component stocks with components reconstituted monthly.

S&P 500® SECTOR TRACKER (Q4 2023)

• 325 companies increased their trailing 12-month dividends Y/Y.
• Financials had the highest number of companies raise their dividends
• Consumer Discretionary had the most notable dividend increases, with significant increases also in the Utilities and Energy sectors

• From a dividend perspective, the Energy, Utilities, and Real Estate sectors offer the highest absolute dividend yields of about 2.8%, 2.7%, and 2.5%, respectively. All sectors are currently trading at yields below their 10 year average.
• Like earnings, the rate of dividend increase and relative yield changes matter; thus, Energy and Industrial stocks seem attractive.