Cash flow is the name of the game in your golden years. In retirement, your paycheck disappears. But, you still need to pay the bills. Safe dividend stocks have some advantages for retirement. Especially the cash flow that it gives to retirees.
Stock companies can pay cash dividends to shareholders. The cash comes from the profits made by the company. In addition to the cash paid by the company, shareholders may also gain if the stock goes up over time. For retirees, the money can be a big part of their income.
Safe Dividend Stocks: Tax Treatment of Dividend Stocks
Dividends paid to shareholders are taxable income. However, there are ways that investors can reduce the taxes that come from dividend income. Some dividends are taxed by the IRS as ordinary income. The ordinary income rate is the same rate as a paycheck.
Some dividends are ‘Qualified.’ Qualified dividends are taxed at the capital gains rate. The capital gains rate is 0%, 15% or 20%, much lower than ordinary income tax rates. For a dividend payment to be considered a qualified dividend, the dividend must meet specific criteria.
- A U.S. company or a qualified foreign company must pay the dividend.
- The dividend cannot be a capital gains distribution of dividends from a tax-exempt organization.
- The investor must hold the stock for 60 days during the 121-day period beginning 60 days before the ex-dividend date.
If these rules are too much, you should consult your tax advisor before investing. You’ll receive a 1099-DIV from your broker if you’re already invested in a dividend-paying stock. Keep in mind that some stock companies do not pay qualified dividends due to their corporate structure. These companies include Master Limited Partnerships (MLPs) and Real Estate Investment Trusts (REITs).
Suppose you own a dividend-paying stock inside a retirement account. For example, if you own the stock inside of a Roth IRA, you will not owe taxes when you withdraw the dividend from the account.
The IRS taxes distributions from a Traditional IRA or 401(k) at the ordinary income tax rate. The tax treatment would be the same for any distribution, even if the distribution came from a dividend payment.
Dividends Can Change Over Time
Many safe dividend stock companies are committed to paying a dividend to shareholders. These are mostly large companies with stable profits. The stability and mature nature of the companies is what allows them to pay dividends.
Investors consider some safe dividend stocks to be ‘Dividend Aristocrats.’ To be on the list of Dividend Aristocrats, the company must have raised its dividend for at least 25 years. Retirees looking for dividend income, Dividend Aristocrats can be a great investment.
The list of Dividend Aristocrats changes all the time. For instance, the list excludes any company that cuts or eliminates its dividend payment. For example, during the COVID-19 pandemic year of 2020, companies around the globe reduced or canceled their dividend payments.
On the other side of the token, companies reaching the 25th anniversary can be added. Being added to the list does not mean that Dividend Aristocrats are a good investment. Also, not being on the list doesn’t mean you should ignore the stock.
The Dividend Yield
So, how do you know if a safe dividend stock is a good buy? First, always make sure that you know the company well. If you believe that the company can continue to pay the dividend well into the future, then move on to the next step.
After you’ve found some safe dividend stocks, think about the return you’ll receive on your money. You can do this by finding the dividend yield. Often, you can find a stock’s dividend yield online.
An investor might find it useful to compare the dividend yield to bond yields, CD rates, or even the dividend yield on other stocks. Retirees might also find it helpful to determine the total dividend payment in their portfolio. Then see if the total dividend payment will produce the income they need.
Dividend Mutual Funds
If all of this seems like too much, you’re not alone. Many retirees let the pros handle it. A dividend mutual fund invests in dividend-paying stocks. The portfolio manager invests in the highest paying safe dividend stocks they can find. Some dividend mutual funds may also invest in bonds.
You should remember that distributions from dividend mutual funds are mostly taxed as ordinary income. If you have any concerns about taxes, please consult your tax advisor.
Retirees should have some fun during their golden years! Picking out the right safe dividend stock or mutual fund can be rewarding. Making sure that you’re confident in your retirement income will let you sleep well at night.