What Are Dividends? How They Are Paid and Taxed

A dividend is a method companies use to distribute a portion of their earnings to individuals who own their stock. When a company is profitable, its leadership can decide to reinvest the money back into the business or share it with the company’s owners, the shareholders. These payments represent a return on a shareholder’s investment in the company. Understanding how these payments are made, their different forms, and their tax consequences is an important part of investing.

The Dividend Payment Process

The journey of a dividend from a company’s treasury to a shareholder’s account is a structured process governed by four distinct dates. It begins when a company’s board of directors formally approves the payment, an event known as the declaration date. On this day, the company publicly announces its intention to pay a dividend, specifying the amount per share and the other key dates in the timeline.

Following the declaration, the next event for an investor is the ex-dividend date. This is the first day that the stock trades without the value of the next dividend payment priced into it. To be eligible to receive the dividend, an investor must purchase the stock before the ex-dividend date. If you buy the stock on or after this date, the previous owner will receive the payment.

The date of record is the day the company finalizes its list of shareholders who are entitled to receive the payment. The company’s transfer agent uses this list, which includes the name and address of each shareholder, to determine who gets paid. An investor must be on the company’s books as a shareholder on this date to receive the dividend.

Finally, the payment date is when the dividend is distributed to the eligible shareholders. This is the day the money is electronically transferred to brokerage accounts or mailed as a check. The time between the date of record and the payment date can vary, but often ranges from a few days to a few weeks, giving the company time to process the payments.

Types of Dividends and Tax Implications

Dividends are most commonly paid in cash, directly deposited into a shareholder’s brokerage account. Some companies may issue stock dividends, where additional shares of the company are given to shareholders instead of cash. Regardless of the form, the Internal Revenue Service (IRS) considers dividends to be income, and they are subject to taxation. The specific tax treatment depends on whether the dividend is classified as ordinary or qualified.

An ordinary dividend, also referred to as a non-qualified dividend, is taxed at an individual’s regular income tax rates. These are the same rates that apply to wages, salaries, and interest income, which can be as high as 37%. Distributions from certain sources, such as real estate investment trusts (REITs) and money market funds, are typically taxed as ordinary dividends. However, portions of these payments can sometimes be classified as capital gains or a return of capital, which have different tax treatments.

A qualified dividend receives more favorable tax treatment, being taxed at the lower long-term capital gains rates. For the 2025 tax year, these rates are 0%, 15%, or 20%, depending on your filing status and taxable income. The 0% rate for qualified dividends applies to single filers with taxable income up to $48,350 and married couples filing jointly with taxable income up to $96,700.

For a dividend to be “qualified,” it must meet specific IRS criteria. The dividend must be paid by a U.S. corporation or a qualified foreign corporation. The investor must also satisfy a holding period requirement. For common stock, the shares must be held for more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. The requirement for preferred stock is longer, as the shares must be held for more than 90 days during the 181-day period that begins 90 days before the ex-dividend date.

Reporting Dividend Income

When tax season arrives, shareholders will receive Form 1099-DIV, Dividends and Distributions, from their brokerage firm or the paying company for each investment that paid a dividend. This form details the total dividend income received during the year. You will receive a separate 1099-DIV for each company or fund that paid you dividends.

The key boxes on Form 1099-DIV for most taxpayers are Box 1a and Box 1b. Box 1a shows your total ordinary dividends, which is the sum of all dividend payments you received. Box 1b, a subset of the amount in Box 1a, shows the portion of your dividends that are considered qualified.

The total ordinary dividends from Box 1a and the qualified dividend amount from Box 1b are reported on their designated lines on your Form 1040 tax return. If your total interest and ordinary dividend income for the year exceeds $1,500, you must also complete and attach Schedule B, Interest and Ordinary Dividends. This schedule requires you to list the source of each dividend payment.