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The Dividend Decoder: Navigating the Types and Taxes for a Steady Income Stream

The Dividend Decoder: Navigating the Types and Taxes for a Steady Income Stream

Our guide on the different types of dividends takes you through these practical, yet critically important considerations when investing in stocks that pay dividends.


Investing in dividend stocks can be a great way to enhance your portfolio’s returns. For investment planning and tax purposes, it’s important to understand the difference between different types of dividends. 

The frequency at which you receive your dividend payments can help you assess and anticipate the amount of income your portfolio will generate. Knowing the specific type of dividend you own – and the rules around it – can help save you from a surprise tax hit when you file with the IRS. 

Dividends: Frequency 

From most to least common, companies generally pay dividends on the following schedules: 

  • Quarterly
  • Monthly
  • One-time

Dividend Frequency Examples 

Dividend Frequency Examples

Quarterly. This is the most common frequency of dividend payments. Every three months for a total of four dividend payments annually. 

Monthly. As of April 2023, 60 companies pay dividends monthly. Many of these companies are Real Estate Investment Trusts (REITs). REITs own, operate or finance real estate assets that generate income. REITs specialize in all types of real estate including residential, office space, retail, data centers and hotels.

REITs trade like regular stocks. However, SEC and IRS regulations require REITs to return 90% or more of their taxable income to shareholders via dividends. 

One-time. Also known as a special dividend, some companies pay one-time dividends apart from their regularly scheduled payments. Companies often do this after selling a large asset or during or after a period of out-sized profitability. 

You can construct a portfolio that pays consistent and meaningful dividend income simply by knowing how frequently companies you’re interested in investing in pay dividends. 

Dividend Taxes 

To ensure you’re not surprised by the taxes the IRS charges on dividends received, you should know the two main types of dividends. They’re taxed differently. You can defer or avoid dividend taxes altogether by holding your dividend stocks in an Individual Retirement Account (IRA). Read on as our guide explains everything you need to know. 

The two primary types of dividends to know are ordinary and qualified dividends. 

To fully grasp the distinction between the two, you need to know what the ex-dividend and record dates of a stock are. 

To receive a dividend, you must officially own a stock on or before the record date. The ex-dividend date usually comes one business day before the record date. If you buy a stock on or after the ex-dividend date, you are not eligible to receive the dividend.

The time between the ex-dividend date and record date gives the stock transaction time to settle in the shareholder’s account. On the record date, a company keeps a list of all shareholders of record entitled to the subsequent dividend payment. 

The Difference Between Ordinary And Qualified Dividends

A qualified dividend is an ordinary dividend that meets requirements set by the IRS

You only pay the capital gains tax on qualified dividends. The IRS treats ordinary dividends like income, therefore you’ll pay taxes on ordinary dividends at your income tax rate. 

To be considered a qualified dividend, you must purchase the stock before the ex-dividend date and hold it for a minimum of 61 days before the dividend payment. In this case, you’ll only pay a capital gains tax, which, as of the 2022 tax year, is either 0%, 15% or 20%. The rate you pay depends on your income. 

A dividend is an ordinary dividend if you own the stock for fewer than 61 days in the 121-day timeframe that commenced 60 days prior to the ex-dividend date. The IRS taxes ordinary dividends on the basis of your income tax rate, which is dependent on your taxable income. As of the 2022 tax year, income tax rates top out at 37%. 

Dividend Tax Example

You own stock in 123 Corp. 

123 Corp pays a quarterly dividend with its most recent record date being September 20. 

If you purchased your 123 Corp shares fewer than 60 days prior to September 20, the IRS considers the dividend you receive an ordinary dividend, treating it like income for tax purposes.

If you bought 123 Corp stock 60 days or more prior to September 20 and held it for a minimum of 61 days in the 121 days prior to the next dividend, the IRS considers the dividend you receive a qualified dividend, taxing it at the more favorable capital gains tax rate. 

Going back to REITs. Regardless of purchase time or holding period, you will pay income tax rates on dividends paid to you by REITs. The IRS considers REIT dividends ordinary dividends. 

Holding dividend stocks in an IRA. There are two main types of Individual Retirement Accounts (IRAs) – Traditional and Roth IRAs. Each comes with specific tax advantages which can impact the type of account you decide to use for your dividend stocks. In these cases, the distinction between ordinary and qualified dividends matters less. 

You contribute before-tax money to a Traditional IRA. You can deduct IRA contributions from your income, up to IRS limits. However, when you withdraw money from a Traditional IRA, the IRS taxes these distributions, including any capital gains or income earned, as regular income. Therefore, while dividends accumulate on a tax-deferred basis inside a Traditional IRA, you will pay income tax on Traditional IRA distributions. 

With a Roth IRA, you make after-tax contributions. You cannot deduct Roth IRA contributions from your income. However, like in a Traditional IRA, your contributions and earnings (capital gains, dividend income, etc.) grow tax-free inside a Roth IRA. 

The big difference and potential advantage for dividend investors using Roth IRAs? When you make qualified withdrawals, the IRS does not tax these distributions, including any capital gains or income (including dividends) you earned. You receive qualified Roth IRA distributions without any tax consequences. 

For specifics on what makes a qualified distribution and contribution limits for Traditional and Roth IRA as well as the type of account that makes most sense for your dividend stocks, consult a tax advisor. 


Frequency of dividend payments on individual stocks and taken together in a portfolio of stocks helps you anticipate when and how much income you will receive. 

Understanding the two key tax statuses – ordinary and qualified dividends – can help you plan when the time comes to report your transactions to the IRS.

The favorable tax treatment of qualified dividends encourages longer-term investing. However, you don’t just buy and hold dividend stocks for the sake of taxes. A buy-and-hold approach can also help you generate meaningful returns as a dividend growth investor. 

For most investors considering dividend types, frequency and tax reporting matters most. Considered in tandem they can help you maximize your total returns and minimize how much money you have to pay Uncle Sam. 


Does the IRS tax special, one-time dividends? 

Yes. The IRS treats special, one-time dividends as unqualified dividends, however you generally don’t face tax consequences until you sell the stock that paid the dividend.

Check with your tax advisor or financial planner to see how and when to report any special, one-time dividends you receive. 

Will I receive a tax form regarding dividend income I received? 

Yes. Your brokerage or bank will send you IRS Form 1099-DIV, which reports dividend income you received during the tax year. Check with your tax advisor or financial planner to see how to handle and report the information on any 1099-DIV forms you receive. 

Is a Roth or Traditional IRA better for dividend stocks? 

This really depends on your specific personal financial circumstances. While traditional IRAs allow for tax-deferred and deductible contributions, a Roth IRA accepts after-tax contributions.

However, the IRS does not tax qualified Roth IRA distributions. Your income and tax bracket today and when you plan to make withdrawals matters when making a choice between the two. Consult a tax or financial advisor to determine your best option. 

What are some popular REIT stocks?

Among investors, Realty Income (O) is one of the most popular, as it not only pays a monthly dividend, but has paid a dividend for 54 years, as of April 2023.

You likely pass by Public Storage (PSA) locations wherever you live. Public Storage is a self-storage REIT. Incidentally, the company paid a special dividend of $13.15 in late 2022.