Qualified Dividends vs. Ordinary Dividends
What are qualified dividends, and how do they differ from ordinary dividends? Here's how to determine which is which, and what that means for you.
- (opens in new tab)
- (opens in new tab)
- (opens in new tab)
- Newsletter sign up Newsletter

At some point in almost every investor's life, they'll be alerted to the fact that they're collecting "qualified dividends." That inevitably prompts the natural question:
What are qualified dividends?
Ultimately, the importance of this distinction has to do with how you're taxed on your dividends. The tax rate on qualified dividends is 15% for most taxpayers. (It's zero for single taxpayers with incomes under $40,000 and 20% for single taxpayers with incomes over $441,451.) However, "ordinary dividends" (or "nonqualified dividends") are taxed at your normal marginal tax rate.

Sign up for Kiplinger’s Free E-Newsletters
Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.
Profit and prosper with the best of expert advice - straight to your e-mail.
But on a more fundamental level: What exactly is a qualified dividend, and how do we know if the dividends paid by the stocks in our portfolios are qualified? And what investments pay out nonqualified dividends?
Let's start by examining how qualified dividends were created in the first place. Then we'll explain how that affects the rules governing them and ordinary dividends today.
How Qualified Dividends Came To Be
The concept of qualified dividends began with the 2003 tax cuts signed into law by George W. Bush. Previously, all dividends were taxed at the taxpayer's normal marginal rate.
The lower qualified rate was designed to fix one of the great unintended consequences of the U.S. tax code. By taxing dividends at a higher rate, the IRS was incentivizing companies not to pay them. Instead, it incentivized them to do stock buybacks (which were untaxed) or simply hoard the cash.
By creating the lower qualified dividend tax rate that was equal to the long-term capital gains tax rate, the tax code instead incentivized companies to reward their long-term shareholders with higher dividends. It also incentivized investors to hold their stocks for longer to collect them.
The idea was to create a better kind of company and a better kind of investor.
It's debatable as to whether the lower rate had the desired effect; in the 17 years that have passed, companies (particularly in the tech sector) continue to hoard a lot of cash, and buybacks were credited with being one of the biggest drivers of the 2009-20 bull market.
But it's certainly true that dividends became more of a focus for both investors and the companies paying them following the 2003 tax reforms. Even tech darlings like Apple (AAPL (opens in new tab)) and Nvidia (NVDA (opens in new tab)) regularly pay dividends.
Qualified Dividends vs. Ordinary Dividends
Qualified Dividends
To be qualified, a dividend must be paid by a U.S. company or a foreign company that trades in the U.S. or has a tax treaty with the U.S. That part is simple enough to understand.
The next requirement gets tricky.
The tax cut was designed to reward patient, long-term shareholders. So, to qualify, you must hold the shares for more than 60 days during the 121-day period that starts 60 days before the ex-dividend date.
If that makes your head spin, just think of it like this: If you've held the stock for a few months, you're likely getting the qualified rate. If you haven't, you're probably not, or at least not yet.
Ordinary Dividends
Certain types of stocks don't make the cut.
For example, real estate investment trusts (REITs) and master limited partnerships (MLPs) typically do not pay qualified dividends. REIT dividends and MLP distributions have more complicated tax rules; however, in some cases, they might actually have lower effective tax rates.
Money market funds and other "bond like" instruments generally pay ordinary dividends. So do dividends paid out via an employee stock-option plan.
The good news: It's actually not your problem to figure this out if you really don't want to. Your broker will specify whether the dividends you received are qualified or not in the 1099-Div they send you at tax season.
But knowing whether you're being paid qualified dividends can help you plan properly. Perhaps you can arrange your dividend stock portfolio such that your lower-taxed qualified dividends are paid into your taxable brokerage account and your higher-taxed ordinary dividends are paid into your IRA.
If all of this is making your head spin, we can summarize like this:
Most "normal" company stocks you've held for at least two months will have their dividends qualified. Many unorthodox stocks – such as REITs and MLPs – and stocks held for less than two months generally will not.
Also, while we summarized the tax basics above, here's a look at how qualified dividends are taxed for every situation for the 2020 tax year:
Charles Lewis Sizemore, CFA is the Chief Investment Officer of Sizemore Capital Management LLC, a registered investment advisor based in Dallas, Texas, where he specializes in dividend-focused portfolios and in building alternative allocations with minimal correlation to the stock market.
-
-
Long-Term Care Planning vs. Taxes: Finding a Healthy Balance
Many families discover that trying to mitigate the cost of long-term care can conflict with another common retirement concern — reducing taxes for retirees and their heirs.
By John M. Graves, Esq., IAR, Agent • Published
-
For a Concentrated Stock Position, Ask Your Adviser This
There can be advantages to having a lot of stock in one company, but ‘de-risking’ can help avoid some significant disadvantages.
By Robert Gorman • Published
-
Stock Market Today: Silicon Valley Bank Failure Sinks Stocks
The largest bank failure since the 2008 financial crisis stole the spotlight from the February jobs report.
By Karee Venema • Published
-
Stock Market Today: Stocks Sink Ahead of February Jobs Report
The major benchmarks finished solidly lower Thursday as bank stocks sold off.
By Karee Venema • Published
-
Stock Market Today: Stocks Choppy After Strong Jobs Data
Both the ADP private payrolls report and the January job openings update came in stronger than expected.
By Karee Venema • Published
-
If You'd Put $1,000 Into Apple Stock 20 Years Ago, Here's What You'd Have Today
Apple stock has lost more than $500 billion in value since its peak, but its long-term performance tells another story.
By Dan Burrows • Published
-
Stock Market Today: Snap Stock Soars in a Quiet Day for Markets
The major benchmarks made modest moves today, though social media stock Snap soared on TikTok buzz.
By Karee Venema • Published
-
Stock Market Today: S&P 500 Snaps Weekly Losing Streak
AI stocks were big winners on Friday after C3.ai posted solid earnings and guidance.
By Karee Venema • Published
-
Stock Market Today: Stocks Bounce Back; UNP Rallies After CEO Splits
The major benchmarks closed higher Monday after notching their worst week of the year on Friday.
By Karee Venema • Published
-
If You'd Put $1,000 Into Nvidia Stock 20 Years Ago, Here's What You'd Have Today
Nvidia stock has been a market-beater recently, but has it always been such a winner?
By Dan Burrows • Published