What is Ordinary Dividends?
247 reads · Last updated: December 5, 2024
Ordinary dividends are a share of a company's profits passed on to the shareholders periodically. One of the primary advantages of owning stocks, also known as equities, is the regular payment of dividend income.Dividends are considered "ordinary" by default, although there are cases when a dividend may be classified as "qualified" because it meets specific criteria. Ordinary dividends are taxed as ordinary income, while qualified dividends are taxed at the lower capital gains rate.
Definition
An ordinary dividend is a portion of a company's profits distributed to shareholders on a regular basis. One of the main benefits of owning stocks, also known as equity, is receiving regular dividend income. By default, dividends are considered 'ordinary dividends,' although in some cases, dividends may be classified as 'qualified dividends' if they meet specific criteria. Ordinary dividends are taxed as ordinary income, whereas qualified dividends are taxed at the lower capital gains tax rate.
Origin
The concept of dividends dates back to the 17th century when the Dutch East India Company first paid dividends to its shareholders. Over time, dividend payments became a standard way for companies to share profits with shareholders. The classification of ordinary dividends was established to differentiate between types of dividends with different tax treatments.
Categories and Features
The main distinction between ordinary and qualified dividends lies in their tax treatment. Ordinary dividends are taxed at ordinary income tax rates, while qualified dividends meet specific conditions to be taxed at the lower capital gains tax rate. Ordinary dividends are typically paid by companies on a regular schedule, which may be quarterly, semi-annually, or annually.
Case Studies
For example, Apple Inc. regularly pays dividends to its shareholders. Apple's dividends are typically considered ordinary dividends unless shareholders meet the criteria for qualified dividends. Another example is The Coca-Cola Company, known for its stable dividend payments, which are usually considered ordinary dividends.
Common Issues
Investors often confuse the tax treatment of ordinary and qualified dividends. Ordinary dividends are taxed at ordinary income tax rates, which can be higher than the capital gains tax rate for qualified dividends. Additionally, investors need to be aware of the dividend payment schedule to plan their finances appropriately.
