The Definition of A Dividend

A dividend is a payment made by a company to its shareholders, usually on a quarterly basis. Companies are not required to issue dividends, but many do so as an incentive for shareholders to own stock in their businesses. When issuing a dividend, a company distributes a percentage of its profits among shareholders, often in the form of a check or cash deposit. Shareholders pay taxes on their dividend income according to their respective tax brackets.

How do I find out which companies pay dividends?

Searching for dividend-paying stocks is easy. If you already use an investment firm to manage your money, they’ll likely have an online search tool to help you pick out stocks that pay dividends. Otherwise, Web sites like MSN Money and Google Finance have free “stock screeners” that allow you to perform custom searches for dividend-paying stocks.

Using these tools, you also can try searching by industries that traditionally pay dividends. Electric power and natural gas utilities have a long history of paying dividends to their shareholders, and tend to pay dividends at above-average rates, compared to other industries.

Who own dividend-producing stocks?

Millions of Americans, from all income levels and age groups, own stocks that pay dividends. Senior citizens and people reaching
retirement age, in particular, represent a large portion of investors who own dividend-paying stocks. In fact, many seniors rely on dividend payments as a way to supplement their retirement income.

According to an April 2008 study done by Ernst & Young, 24.5 million tax returns had dividends from equity investments in 2004 (the latest year for which complete data are available). Of these tax returns, 59 percent were from taxpayers age 50 and older.

How do I know if I have a dividend stock?

Ask your broker. Alternatively, you can review your investment account balance online; or check your mailed statement. If you see a periodic deposit from a company you own stock in, it’s most likely a dividend payment. To be sure, visit the company’s Web site. Almost every shareholder-owned company has a Web page
dedicated to investors, where dividend information can be found. Online stock screeners also are a good way to verify whether your stock pays dividends.

You and Your Dividend

How do shareholders benefit from dividends?

For millions of shareholders, especially retirees, dividends provide a regular source of income-money that can be used to pay bills, buy groceries, purchase medications, fill-up at the gas pump, etc. Even if you don’t rely on dividends for current income, they can be a powerful investment tool to help you generate wealth over the long term. Regular dividend payments add up over time, which then can be reinvested in stocks or other
types of equities.

In addition, dividend-paying companies that experience solid, year-upon-year growth, often raise the percentage of money that they pay out to their shareholders, called a “dividend yield.” A stronger dividend yield means more money in your pocket, and often can raise the perceived value of your company’s stock.

Most important, under current law, taxpayers in the 10- or 15-percent tax brackets pay no taxes on their dividend income. For all other taxpayers, the tax rate on dividend income is capped at 15 percent. However, that may soon change.

The Dividend Tax Rate Reduction

In 2003, Congress passed an important law-the Jobs and Growth Tax Reconciliation Act of 2003-that temporarily reduced the maximum tax rate on dividend income from 38.6 percent to 15 percent. Taxpayers
in the 10- or 15-percent tax brackets currently pay no taxes on their dividend income.

The dividend tax rate reduction is scheduled to expire on December 31, 2010, unless Congress takes action to extend it. This means that the maximum tax rate on qualified dividends could increase significantly for some dividend investors.

The bottom line: we need to take action now in order to keep dividend taxes low.

Lower dividend taxes: What’s in it for companies, and how do they benefit?

Keeping dividend taxes low for shareholders is a major priority for U.S. companies because they too rely on the dividend tax rate reduction. Lower dividend tax rates help companies attract shareholder investment, which they depend upon to finance major infrastructure projects. As an example, electric and natural gas utilities are facing huge infrastructure expenses over the next 30 years, and getting access to investor capital is more critical now than ever before.

Electric and Natural Gas Utilities and Dividends

In April 2008, the Edison Electric Institute (EEI) and the American Gas Association (AGA) released a study done by Ernst & Young, based on IRS data, to determine the demographic profile of utility shareholders. The study found that in 2004 (the most recent year for which complete data are available), 16.7 million tax returns had dividends from equity investments in utility companies. Overall, taxpayers with investments directly and indirectly (through taxable mutual funds) in utility company stocks account
for 68 percent of tax returns with qualified dividends.

Of the tax returns with qualified dividends from direct utility investments, 89 percent were from taxpayers age 50 and older, and 68 percent were from taxpayers with incomes less than $75,000.

What’s clear from the Ernst & Young study is that electric and natural gas utilities are a major source of dividend income for investors. In 2007 alone, electric and natural gas utilities paid out $17.3 billion in dividends to shareholders.

Where We Stand Today

In an effort to preserve this important source of income, the Obama Administration has proposed to maintain the 15-percent tax rate on dividends for most middle-income taxpayers (married taxpayers
earning less than $250,000 per year; single taxpayers earning less than $200,000), and the zero-percent tax rate for low-income taxpayers, as part of its fiscal year 2010 budget proposal.

Separately, Senate Finance Committee Chairman Max Baucus (D-MT) introduced a bill on March 26, 2009, that includes language to make permanent the reduced dividend tax rates for taxpayers in the 10-, 15-, 25-, and 28-percent tax brackets. For taxpayers in upper-income tax brackets, the bill would increase and make
permanent a 20-percent tax rate on dividends, similar to the Obama budget proposal.

Reduced dividend tax rates put more money into your pocket and encourage new investment in dividend-paying companies, helping them raise the capital they need to fund major infrastructure projects and compete in the marketplace.

What You Can Do to Help

Tell Congress to protect dividends from high taxes. Use this site to learn more about the benefits of the dividend tax rate reduction, and sign up to join our effort to keep dividend taxes low.