What Are Ordinary Dividends?
Let me explain ordinary dividends to you directly: they're payments corporations make to shareholders from their profits, usually on a regular basis. If you're owning stocks, which we also call equities, one big perk is getting this dividend income periodically.
By default, dividends are ordinary, but sometimes they can be qualified if they hit certain IRS criteria. You'll pay taxes on ordinary dividends as ordinary income, whereas qualified ones get the lower capital gains rate.
Key Takeaways
Ordinary dividends, or nonqualified ones, come from corporations to their recorded shareholders. They're ordinary unless they satisfy special IRS requirements. You tax them as ordinary income, but qualified dividends face the lower capital gains rate.
Understanding Ordinary Dividends
Dividends split into qualified or non-qualified (ordinary) categories, mostly based on the paying company and how the IRS sees them. If it's not qualified, you tax it as ordinary income.
For qualification, the dividend needs to be from a U.S. company or qualifying foreign one, not listed as unqualified by the IRS, and meet holding periods: at least 60 days for common stock, 90 days for preferred stock, or 60 days for mutual funds paying dividends.
Ordinary dividends can cover various earnings, like those from REITs. The key difference from qualified is the tax rate—you pay ordinary dividends at your regular federal income tax level.
Companies report these on Form 1099-DIV in box 1a, same for mutual funds. When filing taxes, you list them on IRS Form 1040, Schedule B, Line 5.
Tax Changes on Dividends
The big divide between ordinary and qualified dividends is their tax rates, which have shifted over time via congressional acts.
In 2003, taxpayers got lower income tax rates, and qualified dividends switched to long-term capital gains rates via the JGTRRA. That dropped the max capital gains rate from 20% to 15% and set a 5% rate for lower brackets.
Then in 2005, TIPRA extended those provisions to 2010 and cut the rate to 0% for low- to middle-income folks on qualified dividends and gains.
The 2010 Tax Relief Act extended them two more years, and the 2012 American Taxpayer Relief Act made qualified dividends permanent, adding a 20% top rate for the new highest bracket, with annual inflation adjustments.
Fast fact: For 2025, qualified dividends max at 20% tax, ordinary at 37%.
The 2017 Tax Cuts and Jobs Act under Trump didn't change much for dividends and gains. With Trump back in 2025, we'll see if that leads to shifts.
Example of Ordinary Dividends
Take this hypothetical: Say you're Joe Investor with 100,000 shares in Company ABC, paying $0.20 per share yearly. That's 100,000 times $0.20, equaling $20,000 in dividends.
Since ABC doesn't pay qualified dividends, you pay regular income tax on that, not the capital gains rate.
How Do I Earn Ordinary Dividends?
You earn them by holding stocks—one main benefit is that steady dividend income.
How Are Ordinary Dividends Taxed?
They're taxed as ordinary income unless classified as qualified.
What’s the Difference Between Ordinary Dividends and Qualified Dividends?
Mainly, it's the tax rates applied to them.
The Bottom Line
Corporations pay ordinary dividends periodically to recorded shareholders as profit shares. That's the core of it for you as an investor.
Other articles for you
Real Estate Investment Trusts (REITs) enable investors to earn from real estate without direct ownership by pooling funds and distributing dividends.
Logistics involves managing the acquisition, storage, and transportation of resources to their final destination, crucial for business efficiency and supply chain operations.
Social entrepreneurs focus on solving societal problems through innovative, impact-driven ventures rather than prioritizing profits.
The Kyoto Protocol was an international treaty aimed at reducing greenhouse gas emissions from industrialized nations to combat climate change.
Middle-income countries are economies classified by the World Bank with GNI per capita between $1,136 and $13,845, playing a key role in global growth.
Use tax is a self-assessed tax on out-of-state purchases to ensure fair competition and state funding.
FINRA BrokerCheck is a free online tool for researching brokers, firms, and advisers to aid in informed investment decisions.
Giffen goods are essential items where demand increases as prices rise, defying standard economic laws due to strong income effects.
Lifetime cost estimates the total expenses of owning an item over its useful life, beyond just the purchase price.
Volatility skew reveals market expectations through variations in implied volatility across options, aiding traders in pricing and strategy development.