What is an Ordinary Dividend?

An ordinary dividend is a dividend that is not eligible for capital gains tax.

How Does an Ordinary Dividend Work?

For example, let’s assume that John Doe holds 10,000 shares of Company XYZ stock, which pays $0.20 per year in dividends. In total, John Doe receives 10,000 x $0.20 = $2,000 per year in dividends from Company XYZ. Because Company XYZ does not pay qualified dividends, John Doe must pay ordinary income tax (say, 35%) rather than capital gains tax (say, 15%) on the dividends.

In order to be a qualified dividend, the dividend must come from an American company (or a qualifying foreign company), must not be listed as an unqualified dividend with the IRS, and must meet a required holding period. In general, the holding period is at least 60 days for common stock, 90 days for preferred stock, and 60 days for a dividend-paying mutual fund.

Why Does an Ordinary Dividend Matter?

Capital gains taxes are usually lower than ordinary income taxes, which means that qualified dividends can save investors money.