When companies choose to share a portion of their profits with the investors who own shares of the firm, those payments are called dividends, and they work generally the same way from company to company.

How Are Dividends Paid?

Typically, dividends are paid in cash, and they’re sent by the company directly to your brokerage, which will deposit the money into your account. Or many companies mail checks directly to investors who own shares in their firms. Alternatively, you might get dividends as additional shares of stock. Some companies and mutual funds offer the option of a dividend reinvestment plan (DRIP) that will automatically buy additional shares with your dividend payment.

What Is a Qualified Dividend?

Qualified dividends are taxed at a lower rate than ordinary dividends. They’re taxed at the long-term capital gains rate, which ranges from 0% to 20%. Most people won’t pay more than 15% on qualified dividends. As such, investors typically prefer to receive qualified dividends, but they’re the less common kind of dividend paid out.

What Is an Ordinary Dividend?

Any dividend that isn’t a qualified dividend is considered an ordinary dividend—and that’s most of them. In general, investors should assume that any dividend they receive is an ordinary dividend unless they’re told otherwise. The payer of the dividend is required to identify the type of dividend when they report them on Form 1099-DIV at tax time.

How Qualified and Ordinary Dividends are Reported at Tax Time

Generally, an investor will receive a Form 1099-DIV—“Dividends and Distributions”—from each institution or company that pays a dividend of $10 or more. This form reports your capital gains distributions, dividend and non-dividend distributions, and any taxes withheld from your payments during that tax year. Even if an investor does not receive a 1099-DIV from a company, they are still required to report any dividends on their tax return.

How to Pay Less Taxes

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