What You Should Know About Dividend ETFs and Taxes

There are two truths about the market today: in one month, your taxes will be due and many companies are resuming, raising or starting to pay dividends. Do you know what you’ll be on the hook for if you own dividend exchange traded funds (ETFs)?

Dividends generally come in two incarnations: qualified and non-qualified. The qualified dividends are what most of us like, because they’re taxed at a lower rate – often 15% for the highest of earners. Non-qualified dividends are taxed at ordinary income rates, often a lot higher than 15%. [ETFs and Taxes: What You Should Know.]

It’s important to be aware of which kinds of dividends your ETF pays. Here are two examples:

• SPDR Dow Jones Industrial Average (NYSEArca: DIA) pays qualified dividends, because DIA primarily owns shares of U.S. dividend-paying companies.
• SPDRs (NYSEArca: SPY) pays both types of dividends; the non-qualified dividends exist because SPY owns some real estate investment trusts (REITs), which pay that type of dividend.

We’re not tax professionals, and this shouldn’t be construed as tax advice. Consult your own professional for guidance specific to your situation. [How Commodity ETFs Are Taxed.]

For more stories about dividend investing, visit our dividend category.