Filling your investment portfolio with dividend-paying stocks is a strategy used by people who want to have a steady stream of income without having to sell their shares. If you are budgeting for your future income and expenses, it’s helpful to be able to calculate how large your dividend checks are expected to be. However, dividends aren’t guaranteed, and the tax treatment of dividend income varies depending on whether the dividends are qualified or not.
TL;DR (Too Long; Didn't Read)
You can calculating the income you will derive from both common stock dividend and preferred stock dividends using simple mathematical formulas. It is important to remember, however, that any income you earn will be taxed based on the particular qualified or non-qualified status of the dividend itself.
Calculating Common Stock Dividend Payments
Common stock dividends aren’t guaranteed and can fluctuate from year to year, or even quarter to quarter, depending on the company’s profitability and its growth strategy. When a dividend is announced, you can calculate how much you’ll be receiving by multiplying the number of shares you own by the dividend payment per share. For example, if a stock announces a dividend of $0.30 per share and you own 40 shares, multiply $0.30 per share by 40 shares to find that you’ll be receiving a dividend check for $12.
Dividends can be paid once per year, or periodically, such as every quarter. In addition, there can also be special dividends paid out at any time. To calculate your total dividends, add all of the periodic dividends, plus any special dividends, to find your total dividends for the year. For example, say that the $0.30 dividend was a quarterly dividend and the company also made a one-time $0.50 special dividend. That means the total annual dividends for the company comes to $1.70 per share.
Calculating Preferred Stock Dividend Payments
With preferred stock, the dividend payment is set based on the par value of the stock, regardless of how much you paid for it. To calculate the preferred stock dividend payment, multiply the dividend rate by the par value of the stock to find the preferred dividend per share. Then, multiply the preferred dividend per share by the number of shares you own to calculate your total dividend payment.
For example, say you own 50 shares of preferred stock with a par value of $30 per share and a dividend rate of 5 percent. First, multiply 30 shares by 5 percent per share to find the per-share dividend is $1.50. Then, multiply $1.50 by 50 to find that your total dividend payment will be $75.
Income Taxes on Dividends
When you receive a dividend payment, you typically won’t have any income taxes withheld, but that doesn’t mean you don’t have to pay any. Depending on the company and how long you’ve owned the stock, the dividends could be taxed as qualifying dividends or non-qualifying dividends. If your dividends are qualifying dividends, that income is taxed at the lower, long-term capital gains rates. However, if they are non-qualifying dividends, the income is taxed at the higher, ordinary income tax rates.
To calculate how much you’ll pay in taxes, multiply the tax rate that applies to the dividends by your dividend income. For example, if you receive a $75 qualified dividend that will be taxed at 15 percent, multiply $75 by 0.15 to find you’ll owe $11.25 in income taxes, leaving you with $63.75 after taxes. But, if that same $75 is non-qualified dividend income and is taxed at 28 percent, you’ll pay $21 in income taxes, leaving you with $54 after taxes.
Qualified Versus Non-Qualified Dividends
Your dividends must meet several criteria to be taxed at the lower, capital gains rates. First, the dividend must be paid by a U.S. corporation or a qualified foreign corporation. To be a qualified foreign corporation, the company must be either incorporated in the United States, eligible for tax benefits under a tax treaty between the United States and the foreign country, or the stock is easily traded through an established securities market in America. In addition, you must meet the holding period to qualify. For common stock dividends, you must own the stock for at least 61 days during the 121-period that starts 60 days before the ex-dividend date and ends 60 days after the ex-dividend date. For preferred stocks, the required holding period is longer. You must hold the preferred stock for at least 90 days out of the 181-day period starting 90 days prior to the ex-dividend date and ending 90 days after the ex-dividend date.