How Dividends Are Paid and Taxed

A dividend is a payment a company makes to its shareholders out of its earnings. Whether a particular buyer receives it depends on the ex-dividend date, and how the payment is taxed depends mainly on whether it is "qualified", which in turn depends on how long the shares were held. Most large US companies pay one: S&P Dow Jones Indices reported on January 7, 2026, in its fourth-quarter 2025 dividend report, that 409 issues, or 81.3% of the S&P 500, pay a dividend. Federal rules only are covered here; state treatment is separate and varies by state.

Key takeaways

• A buyer on or after the ex-dividend date does not receive the upcoming dividend; since standard settlement moved to one business day, the ex-date is generally the same day as the record date, except for distributions worth 25% or more of the share price.
• Qualified dividends are taxed at 0%, 15% or 20%; all other taxable dividends are taxed as ordinary income. For 2026 the 0% rate applies up to $49,450 of taxable income for single filers and $98,900 for joint filers.
• To be qualified, common stock generally must be held more than 60 days within the 121-day window that starts 60 days before the ex-date. Buying 10 days before the ex-date and selling 30 days after it gives only 40 days and fails the test.
• Higher-income investors may owe a further 3.8% net investment income tax on dividends once modified adjusted gross income passes $200,000 (single) or $250,000 (joint).
• Form 1099-DIV separates ordinary dividends, qualified dividends, return of capital and foreign tax paid, but the investor still has to confirm the holding period in some cases.

The four dates behind a dividend

Every dividend moves through the same sequence. The company declares the dividend and sets a record date, which is the date on which you must be on the company's books as a shareholder to receive it. The ex-dividend date is then set under exchange and FINRA rules rather than by the company. The payment date is when the money is actually sent.

Under the SEC's Investor.gov explanation of ex-dividend dates, the ex-date for stocks is usually the record date, or one business day earlier if the record date is not a business day. If you buy on the ex-date or later, the seller gets the dividend; if you buy before it, you do.

Why the ex-date moved

The SEC's rule shortening the standard settlement cycle to one business day after the trade (T+1) had a compliance date of May 28, 2024. From that date, FINRA's T+1 amendments, announced in Regulatory Notice 24-04, changed FINRA Rule 11140 so that, for distributions under 25% of the security's value, the ex-date is the record date, or the business day before it if the record date is not a business day. The reason is timing: a trade made on the record date now settles the next business day, too late to put the buyer on the books for that record date. Under the two-day cycle, the 2017 version of the rule set the ex-date one business day before the record date.

A dated example

Investor.gov's own illustration declares a dividend on Monday, March 2, 2026, with a record date and ex-date of Monday, March 16, and payment on Tuesday, March 17. Anyone who bought on March 16 or later does not receive it. When the record date is a Sunday (March 15 in its second example), the ex-date falls on the preceding Friday, March 13.

Cash, stock and special dividends

Most dividends are paid in cash, and reinvesting a cash dividend automatically does not change its tax treatment (see the FAQ). Investor.gov notes that a dividend can also be paid in stock, either extra shares of the company or shares of a subsidiary being spun off, and that the procedures may differ. Under FINRA Rule 11140, a stock dividend or split worth 25% or more of the stock's value goes ex on the first business day after it is paid, while smaller stock dividends follow the normal record-date rule. When the ex-date falls after the record date, someone who sells before the ex-date must deliver the new shares to the buyer, settled through an IOU known as a "due bill".

The same 25% threshold applies to cash. For a dividend equal to 25% or more of the stock's value, Investor.gov states that the ex-date is deferred until one business day after the dividend is paid. In its March example the ex-date would then be Wednesday, March 18, 2026.

The price on the ex-dividend date

A cash dividend moves value out of the company, so the share price can fall by about that amount on the ex-date; Investor.gov says this about significant dividends specifically. The same adjustment shows up in open orders: FINRA Rule 5330 generally requires a member firm holding a customer's open order to reduce its price by the cash dividend on the ex-date, unless the order is marked "Do Not Reduce". In practice the quoted price also reflects every other force acting that day, so the dividend is rarely visible as a clean step down.

Illustrative example (hypothetical numbers). A stock closes at $80.00 and pays a $0.60 quarterly dividend. Holding 100 shares, the position is worth $8,000 before the ex-date. All else equal, the price opens near $79.40, so the shares are worth $7,940, and $60 in cash arrives on the payment date. The total, $8,000, is the same. The dividend did not create value; it moved part of it from the share price to cash, and in a taxable account the cash is taxable.

Yield and payout ratio

Two ratios are used to describe a dividend. Yield compares the annual dividend with the share price; the payout ratio compares the dividend with the company's earnings.

Dividend yield = annual dividend per share / share price
Payout ratio   = dividends per share / earnings per share

Using the same hypothetical stock: four payments of $0.60 are $2.40 per year, and $2.40 / $80.00 = 3.0%. If the company earned $4.00 per share, the payout ratio would be $2.40 / $4.00 = 60%. A yield also rises when the price falls even if the dividend is unchanged.

Qualified vs ordinary dividends

All taxable dividends are ordinary income, but IRS Topic 404 explains that qualified dividends are the ordinary dividends taxed at lower capital gain rates, and that the payer must identify which are which. IRS Publication 550 (2025 edition) adds that you can assume a dividend on common or preferred stock is ordinary unless the payer says otherwise, and that the lower 0%, 15% or 20% rate applies only if all of these hold:

• The dividend was paid by a US corporation or a qualified foreign corporation.
• It is not one of the excluded types, such as capital gain distributions, dividends from tax-exempt organizations, or payments in lieu of dividends where you know they are not qualified.
• You met the holding period.

2026 rate thresholds

The brackets are set by taxable income, not by the size of the dividend. For tax years beginning in 2026, Revenue Procedure 2025-32 (section 3.03) lists these breakpoints, which apply to qualified dividends and net capital gain alike:

IRS Topic 409 ties these rates to taxable income and says the 20% rate applies to the extent taxable income exceeds the 15% threshold, so one year's qualified dividends can be taxed partly at one rate and partly at the next. The Qualified Dividends and Capital Gain Tax Worksheet in the Form 1040 instructions, which Publication 550 points to, does that split when ordinary income and qualified dividends sit in the same return.

The holding-period test

Per Publication 550, common stock must be held more than 60 days during the 121-day period that begins 60 days before the ex-dividend date. When counting, include the day you sold but not the day you bought. For preferred stock whose dividends are due to periods totaling more than 366 days, the requirement is more than 90 days during a 181-day period beginning 90 days before the ex-date; otherwise the 61-day rule applies. Days are not counted when you had an option to sell, a contractual obligation to sell, or an open short sale of substantially identical stock; when you had granted an option to buy substantially identical stock; or when your risk of loss was reduced by holding other positions in substantially similar or related property.

Illustrative example (hypothetical dates). Assume an ex-date of June 15, 2026, so the 121-day window runs from April 16 to August 14. An investor buys on June 5, 10 days before the ex-date, and sells on July 15, 30 days after it.

When both dates fall inside the window, days counted are the sale date minus the purchase date, because the purchase day is excluded and the sale day included. A one-day shorter holding (sale on August 4) gives 60 days and fails. The dividend is paid either way; the holding period only decides the tax rate.

What $1,000 of dividends costs

Dividend income is added to the rest of the return, so the same $1,000 can be taxed very differently. The table shows federal tax only, with the net investment income tax discussed below.

The 3.8% net investment income tax (NIIT) is described in IRS Topic 559. Dividends count as net investment income, and the tax applies to the lesser of net investment income or the amount by which modified adjusted gross income exceeds $250,000 (married filing jointly or qualifying surviving spouse), $125,000 (married filing separately) or $200,000 (single or head of household). The last two rows therefore assume income above the threshold by at least $1,000. On this example, the difference between a 15% qualified dividend and a 24% ordinary one is $90 per $1,000, and the NIIT adds $38 to either.

Reading Form 1099-DIV

Topic 404 states that you should receive a Form 1099-DIV from each payer for distributions of at least $10, and that Schedule B is required when taxable ordinary dividends exceed $1,500. Box names below follow the IRS instructions for Form 1099-DIV (January 2024 revision).

The form shows what the payer reports; what goes on your return is your responsibility. For box 1b the payer is told to include dividends for which it is impractical to determine whether the holding period was met, so a qualified amount on the form does not prove you passed the test. Return of capital in box 3 works through basis: with $1,000 of basis and $150 of box 3 distributions, the basis becomes $850 and nothing is taxed that year. Once basis reaches zero, further distributions are capital gain, long-term or short-term depending on how long the stock was held. For foreign tax, IRS Publication 514 describes the credit. It also describes an exemption that lets you claim it without Form 1116. The exemption requires that your only foreign-source gross income for the year is passive category income (which generally includes dividends), that the qualified foreign taxes are not more than $300 ($600 on a joint return), that all of the income and tax are reported on a payee statement such as Form 1099-DIV, and that you elect it. If you make the election, you cannot carry unused foreign tax back or forward to or from that year.

Frequently asked questions

Are reinvested dividends still taxed?

Yes. Publication 550 says that if dividends are used to buy more stock at fair market value, they must still be reported as income. If a plan sells shares at less than fair market value, the discount can also be dividend income.

Are stock dividends taxable?

Generally not, according to Publication 550. They become taxable in listed cases, for example when any shareholder can choose cash or other property instead of stock.

Do dividends inside an IRA get taxed each year?

Not in the year they are paid. The IRS describes traditional IRA earnings as untaxed until a distribution is taken, and Investor.gov says income earned in a Roth IRA, including dividends, is generally tax-free, subject to the account rules.

Who reports a dividend if the stock is sold after it is declared?

Publication 550 says that if stock is sold after a dividend is declared but before it is paid, the owner of record, usually the payee on the dividend check, must include the dividend in income. Who is entitled to the payment is a separate matter, governed by the ex-dividend date described above.

Does a capital gain distribution count as a qualified dividend?

No. Publication 550 lists capital gain distributions among the dividends that are not qualified dividends even if they appear in box 1b, and says they are reported as long-term capital gains.

A checklist before the next ex-date

1. Find the declared record date and ex-date in the company's announcement or the broker's calendar, and count your trade date against the ex-date.
2. Write down your purchase date and count the days to a planned sale, excluding the purchase day, to see whether you would pass the 61-day test (91-day for qualifying preferred stock).
3. Compare your expected taxable income with the 2026 breakpoints in the table to see which rate band applies.
4. When the 1099-DIV arrives, compare boxes 1a, 1b, 3 and 7 with your own records, and keep the box 3 amounts to track basis.
5. Use the IRS worksheets, or a licensed tax professional, for the final calculation.

Sources

• Investor.gov (SEC): Ex-dividend dates, when are you entitled to stock and cash dividends
• Investor.gov (SEC): Individual Retirement Accounts
• SEC press release 2023-29: Finalizes rules to reduce risks in clearance and settlement
• FINRA Regulatory Notice 24-04: Amendments to conform FINRA rules to the T+1 settlement cycle
• FINRA Rule 11140: Transactions in securities "ex-dividend"
• SEC Release 34-81448 (2017): FINRA Rule 11140 amendments for T+2
• FINRA Rule 5330: Adjustment of orders
• S&P Dow Jones Indices: U.S. dividend report for Q4 2025 (January 7, 2026)
• IRS Publication 550 (2025): Investment Income and Expenses
• IRS Topic No. 404: Dividends
• IRS Topic No. 409: Capital gains and losses
• IRS Topic No. 559: Net investment income tax
• IRS Revenue Procedure 2025-32: 2026 inflation adjustments
• IRS Instructions for Form 1099-DIV
• IRS Publication 514 (2025): Foreign Tax Credit for Individuals
• IRS: Traditional IRAs