Dividend yield is not actual income, 3.8% tax impact

Dividend yield is the ratio of a company's annual dividends relative to its stock price, and it is a pre-tax measure. The cash investors actually receive varies depending on taxes, fees, and other factors.

U.S. tax law divides dividends into qualified dividends and ordinary dividends. The tax treatment of the two differs.

Qualified dividends are taxed at the long-term capital gains tax rate. Depending on the tax bracket, a rate between 0% and 20% may apply.

Ordinary dividends are taxed at the standard income tax rate. An individual’s final tax rate may be applied directly here.

To be recognized as a qualified dividend, the holding-period requirement must be met. In general, the rule requiring shares to be held for more than a certain number of days before and after the dividend date applies.121day 60and is held for more than the required number of days.

For high-income investors, the net investment income tax (NIIT) 3.8may be added. Foreign stocks may be subject to local withholding taxes, and brokerage fees and the timing of dividend reinvestment also change actual cash flow.

Dividends from REITs or partnerships such as MLPs are generally classified as non-qualified dividends and are often taxed at ordinary income tax rates. By contrast, in tax-advantaged accounts such as individual retirement accounts and similar accounts, taxes are not imposed immediately.401s and similar tax-advantaged accounts, taxes are not imposed immediately.

Therefore, you should not determine expected after-tax cash flow based only on the dividend yield. You need to check the nature of the dividend, tax law provisions, and account type together.