A qualified dividend is a dividend paid by a stock that meets certain requirements that allow it to be taxed at a lower rate than an individual’s normal income tax rate. In 2008, qualified dividends were reduced to a 0% tax rate for those people in the 10%-15% income tax brackets, making them a great source of income for average people.
Qualified dividends must be paid by a US corporation or by a corporation owned by a US entity. They may also be owned by a foreign corporation that’s located in a country that benefit from a US tax treaty. You must also hold the stock for a minimum of 60 days during a 121 day period that begins 60 days prior to the ex-dividend date. The ex-dividend date is defined as the first day after a stock owner is no longer eligible to receive another dividend payment for the stock. If you sell a stock after the ex-dividend date, the dividends will be payable to the new owner.
The qualified dividend tax rate is calculated based on when the dividend is paid and the owner’s tax bracket. The current 0% tax rate will expire on December 31st, 2012 and will return to the individual’s normal tax rate on any dividends paid after this date.
Stocks that Pay Dividends
Having dividend paying stocks is an important part of any balanced portfolio. They can provide a long term, reliable source of income you can count on for a rainy day. The most common dividend paying stocks are in the energy and financial sectors.
CFOs have the choice to make at the end of any earnings period, which is to reinvest the profits, purchase more shares of common stock or pay dividends to the shareholders of the company. The CFO is always trying to make the best decision for the owners of the company, which doesn’t always include paying out dividends.
Dividends are most commonly paid out by large companies that are in mature industries. An example would be a power company that’s located in a franchise territory in a developed area, meaning they serve a specific area with little room for expansion. Reinvestment options are rather limited when your customer base isn’t growing and you already have most of the equipment and personnel you need to run your company effectively. In this case, the CFO of the company may choose to pay dividends using the profits earned by the company to the shareholders.
Highest Dividend Paying Stocks
The best dividend paying stocks on the Dow Jones Industrial Index are known as blue chip stocks. These stocks include behemoth companies such as AT&T, Verizon, Merck, Pfizer, Kraft, Johnson & Johnson and Intel. Each of these companies paid in excess of 3% dividends as of February 2011.
If we look at a smaller subset stocks known as the Dow Jones Utilities, we see that 13 out of 15 are regularly paying dividends of greater than 3%, as opposed to only 7 of 30 paying dividends in excess of 3% in the Dow Jones Industrial index. This goes to show that the best paying qualified dividends come from large established companies, especially in the utilities sector.
Dividend paying stocks and stocks that pay dividends
A large number of major stocks have started paying dividends. These are not limited to your normal run of the mill blue chip stocks.
Many include tech companies and small caps. For an income investor dividend paying stocks can be a real treat. Traditionally these have been limited to the dow jones, but now you can find them on the nasdaq or numerous other smaller exchanges. Maybe in the future a stock like facebook will pay a dividend.