Are Dividends Considered Portfolio Income?

Identification

• Corporations elect to either reinvest profits back into their respective businesses, or to return the money to shareholders -- in the form of dividends. You can expect large, mature companies to provide higher dividend income. Small companies have more opportunity for growth, and are likely to reinvest their profits toward expansion.
  
  Dividends are generally quoted and paid quarterly. For example, a $50 stock may pay out a 25 cents per share quarterly dividend. From there, you can expect to earn $1 worth in annual dividend payments -- for a dividend yield of 2 percent ($1 / $50 = 2 percent). With a $1,000 investment into this stock, you can expect to make $20 in annual dividend income.
  
  

Features

• To budget effectively, you should become familiar with the typical dividend payment schedule. Each quarter, the dividend payment schedule includes ex-dividend and payable dates. According to the Securities and Exchange Commission (SEC), you must purchase and own shares of stock prior to, and through, their ex-divided date in order to receive dividends on the payable date. The dividend payable date is usually one month after the ex-divided date. You can contact a corporation's investor relations department for detailed dividend schedule information.
  
  

Considerations

• Your brokerage company prepares and submits a 1099-DIV form during the tax season to document your dividend income over the past year. For tax purposes, your dividends are classified as either ordinary or qualified dividends. As of 2010, ordinary dividends are taxed as ordinary income -- at tax rates of 10, 15, 25, 28, 33 and 35 percent. Qualified dividends receive special tax treatment, and are either tax-free, or taxed at a low 15 percent rate. For your dividends to qualify, you must have held shares of stock for more than 60 out of the 120 days surrounding their ex-dividend date.
  
  

Strategy

• Special retirement and education accounts offer tax-deferred growth, which allows you to bypass dividend income taxes. These accounts include 401(k), Individual Retirement Account (IRA) and 529 plans. The federal government and the financial services industry have created these accounts to encourage long-term savings for important financial goals. You must comply with certain restrictions in order to avoid dividend income taxes and penalties. For example, you may owe a 10 percent penalty tax on any 401(k) withdrawals made before age 59 and a half.
  
  

Warning

• Dividend income is not guaranteed, as corporations make these payments at their discretion. Corporations will sharply reduce their dividend payouts amid financial distress and business losses.