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After a recent review of Dividend Reinvestment, readers had many questions about the related financial topic.
Below, we’ll address some of the most common issues.
What should I know about reinvesting dividends and wash sales?
reinvest dividends Means purchasing additional shares, which could complicate harvesting of sales or tax losses in a taxable account.
this IRSThe wash sale rules prohibit claiming a tax loss after the sale if you purchased the same or “substantially the same” security 30 days before or after the sale.
You can wait at least 30 days after a dividend before selling, and be sure to sell at least 30 days before the next dividend, but to reduce headaches, it’s best not to reinvest dividends into holdings that you plan to sell soon.
If I reinvest the dividends, will I end up with fractional shares that are difficult to sell?
Reinvesting dividends usually means buying a small amount of dividends and adding them to your existing stock/fund position.
You may end up with fractional shares, meaning you only own part of the shares. Most prime brokerage firms allow you to sell odd lots, but you typically need to sell odd lots on a market order, and it may take an extra day to clear the odd lot.
How are dividends taxed?
For stocks and stock funds, the tax rate depends on whether the dividend is a qualified dividend or a nonqualified dividend (also called an ordinary dividend).
dividends You qualify if you meet the 60-day holding requirement within the 121-day window before and after the ex-dividend date; these assets are taxed at capital gains rates – 0% or 15% for most people.
Others are taxed as ordinary income. Dividends that do not meet these requirements are disqualified and taxed as ordinary income.
link or link Fund payments are considered interest income and are generally taxed as ordinary income. Revenue comes from Ministry of Finance The bonds are exempt from state and local taxes, and income from municipal bonds are generally exempt from federal, state, and local taxes, depending on the issuer’s location.
Are reinvested dividends taxable?
Dividends held in a taxable account are taxable whether received as cash or reinvested.
If you reinvest dividends, you’ll need to add each dividend to your cost basis of holding. You may end up with many separate tax jurisdictions with different cost basis levels. When you sell stock, you need to match each sale to a specific tax batch.
Are dividend-paying stocks better?
money is fungible – it doesn’t matter whether you receive income or capital appreciation.
The value of a company should not depend on whether it pays dividends. However, behavioral finance researchers have found that many investors view dividends as more stable and predictable than capital gains. Tax issues are another important consideration.
How do dividend-oriented strategies perform in a recession?
Historically, dividend stocks perform well during economic slowdowns and can provide downside protection when funds draw back. However, funds that focus on high-yield stocks without incorporating quality screens tend to invest more in economically sensitive industries and companies that may not be able to continue paying dividends during a recession.
Can I live off the dividend and interest income from my investment portfolio in retirement?
Some investors prefer this approach. Dividends can create steady income similar to a regular paycheck, and many investors like the idea of keeping their principal intact. However, it can be difficult to create a portfolio that generates sufficient returns for a pure income approach, especially one that keeps pace with inflation.
Relying on income alone to support retirement expenses may mean you need to accumulate a larger investment portfolio. By the same token, an income-focused approach means you may underspend during retirement and be left with a large portfolio balance when you die. This may appeal to retirees with a strong interest in leaving a legacy, but will limit how much you can spend while you’re still alive.