What Is an Ordinary Dividend? A Simple Guide to Understanding Your Investment Income

Have you ever looked at your investment statement and wondered what exactly those dividend payments are? Maybe your scratching your head about how they’re taxed? Well. I’m here to break down ordinary dividends in a way that actually makes sense – no finance degree required!

The Basics of Ordinary Dividends

Ordinary dividends are basically a share of a company’s profits passed on to the shareholders periodically. When you own stocks (also called equities) one of the main perks is getting these regular dividend payments. It’s like the company saying “thanks for investing in us” by giving you a piece of their success.

Think of it this way – when you buy stock in a company you become a partial owner. As that company makes money they might decide to share some of those profits with you through dividends. Pretty cool, right?

Ordinary Dividends vs. Qualified Dividends

Here’s where things get a bit more complex. Not all dividends are created equal, especially when tax time rolls around:

Ordinary Dividends:

• Taxed as regular income (like your paycheck)
• Subject to your normal tax bracket rate
• The default classification for most dividend payments

Qualified Dividends:

• Taxed at the lower capital gains tax rate
• Can save you significant money on taxes
• Must meet specific holding period requirements

To give you a real example, let’s say you own 1,000 shares of a company that pays a $0.50 dividend per share annually. You’d receive $500 in dividends for the year. If these are ordinary dividends, you’d pay taxes based on your regular income tax rate – which could be as high as 37% for high earners in 2025!

When Are Dividends Considered “Ordinary”?

Most dividends from corporations are considered ordinary by default. According to the IRS, dividends are ordinary unless they specifically meet the requirements to be qualified.

Some dividends are almost always ordinary, regardless of how long you’ve held them:

• Money market fund dividends
• Dividends from REITs (Real Estate Investment Trusts)
• Dividends from Master Limited Partnerships (MLPs)
• Dividends from employee stock ownership plans
• Most dividends from foreign corporations
• Dividends paid by banks on deposits

The Tax Implications of Ordinary Dividends

Let’s be honest – taxes are probably the main reason you’re interested in understanding ordinary dividends. So here’s what you need to know about how they’re taxed.

Ordinary dividends are taxed as ordinary income, meaning you’ll pay the same rate as you do on your regular income like wages or salary. For 2025, these rates range from 10% to 37%, depending on your income bracket.

Here’s a quick look at the ordinary income tax brackets for 2025:

In contrast, qualified dividends are taxed at capital gains rates of 0%, 15%, or 20%, depending on your income. This can result in substantial tax savings, especially for investors in higher tax brackets.

How Will You Know If Your Dividends Are Ordinary?

Good news! You don’t have to figure this out on your own. Companies that pay dividends report this information to both you and the IRS using Form 1099-DIV. This form breaks down your dividend payments into different categories:

• Box 1a: Total Ordinary Dividends
• Box 1b: Qualified Dividends (a subset of ordinary dividends that qualify for lower tax rates)

You’ll typically receive this form by January 31 for the previous tax year’s dividends. The company has already done the work of determining which dividends qualify for the preferential tax treatment.

A Brief History of Dividend Taxation

Before 2003, all dividends were considered ordinary dividends and taxed at regular income tax rates. However, the Jobs and Growth Tax Relief Reconciliation Act of 2003 (JGTRRA) created the concept of qualified dividends that could be taxed at the lower capital gains rates.

This change was actually made to encourage companies to pay more dividends and to make dividend-paying stocks more attractive to investors. Since then, we’ve seen dividend investing become even more popular as a strategy for building wealth and generating income.

Practical Example: How Ordinary Dividends Affect Your Taxes

Let’s walk through an example to see how ordinary dividends might impact your tax bill.

Imagine you’re a single filer with a taxable income of $75,000 in 2025, placing you in the 22% tax bracket. During the year, you received $3,000 in ordinary dividends.

Those $3,000 in ordinary dividends would be taxed at your 22% marginal tax rate, resulting in $660 in taxes on your dividend income.

However, if those same dividends had been qualified dividends, they would be taxed at the 15% long-term capital gains rate instead, resulting in only $450 in taxes – saving you $210!

Strategies for Managing Dividend Taxes

Since ordinary dividends are taxed at higher rates than qualified dividends, here are some strategies we recommend for managing your dividend taxes:

1. Hold dividend-paying stocks long enough to qualify for the lower qualified dividend tax rates (generally more than 60 days during the 121-day period beginning 60 days before the ex-dividend date)

2. Consider keeping investments that generate ordinary dividends in tax-advantaged accounts like IRAs or 401(k)s where the dividends won’t be taxed immediately

3. Focus on qualified dividend-paying stocks in your taxable accounts to minimize your current tax liability

4. Review your 1099-DIV forms carefully to understand which of your dividends are ordinary versus qualified

Common Questions About Ordinary Dividends

Do I have to report all dividend income on my tax return?

Yes, even if you don’t receive a 1099-DIV, you’re required to report all dividend income on your tax return. If you receive more than $1,500 in ordinary dividends, you’ll need to complete Schedule B of Form 1040.

Can ordinary dividends ever become qualified dividends?

Yes! The same dividend payment might be ordinary for one investor and qualified for another, depending on how long each investor has owned the stock. If you hold the stock long enough to meet the IRS holding period requirements, what would otherwise be ordinary dividends may qualify for the lower tax rate.

Are dividend reinvestments taxed?

Absolutely. Even if you never see the cash because you’re reinvesting your dividends to buy more shares, those dividends are still taxable in the year they’re paid (unless they’re in a tax-advantaged account like an IRA).

The Bottom Line on Ordinary Dividends

Ordinary dividends represent your share of a company’s profits as a shareholder. While they provide a nice source of investment income, it’s important to understand that they’re typically taxed at your ordinary income tax rate, which is higher than the preferential rates for qualified dividends.

By understanding the difference between ordinary and qualified dividends and implementing smart tax strategies, you can potentially reduce your tax burden while still enjoying the benefits of dividend-paying investments.

Remember, dividend investing can be a powerful way to generate income and build wealth over time. And while taxes are important to consider, they shouldn’t be the only factor in your investment decisions. Quality companies with strong dividend payment histories can be valuable additions to your portfolio regardless of their tax treatment.

Have you checked your most recent investment statements to see what portion of your dividends are ordinary versus qualified? It might be worth taking a closer look before tax time rolls around!