New Case Spotlights Qualified Dividends | ETF Trends

Following its June debut, the Principal Spectrum Tax-Advantaged Dividend Active ETF (PQDI) is proving to be one of the more well-timed new ETFs to come to market this year and that status is becoming clear as the Internal Revenue Service (IRS) examines qualified dividends.

PQDI is the first of its kind—offering investors access to qualified dividend income via all three sectors of the global U.S. dollar capital securities market. The Principal ETF targets qualified dividends, thereby helping U.S. taxpayers boost after-tax income.

SIH Partners, a Delaware partnership, is challenging the IRS in tax court over IRS’s disallowance of $26 million in foreign tax credits the partnership claimed withholding taxes related to Swiss investments.

“In general, to qualify as QDI under section 1(h)(11)(B)(iii), a dividend must be paid on stock that the taxpayer holds for at least 61 days during a 121-day period beginning 60 days before the ex-dividend date,” according to Lexology. “To claim the foreign tax credit under section 901(k)(1), the taxpayer must hold the stock for at least 16 days during the 31-day period beginning 15 days before the ex-dividend date. The IRS asserts SIH Partners did not meet either holding period requirement because it also had short exposure to the stock through a portfolio swap.”

PQDI Advantages

That’s a lot of legal mumbo jumbo, but, indirectly, it underscores the advantages associated with qualified dividends and why prescient seek this form of income.

PQDI “seeks to provide current income. Under normal circumstances, the fund invests at least 80% of its net assets, plus any borrowings for investment purposes, in dividend-paying securities at the time of purchase,” according to Principal. “Such securities include, without limitation, preferred securities and capital securities of U.S. and non-U.S. issuers. The fund invests significantly in securities that, at the time of issuance, are eligible to pay dividends that qualify for favorable U.S. federal income tax treatment.”

PQDI benefits don’t end there. As part of its elevated income-generating capabilities, the Principal fund holds assets such as preferred stocks and real estate investment trusts (REITs).

Not only do those assets typically sport higher yields than U.S. government debt and common dividend stocks, but REITs and preferreds are, historically, less correlated to traditional asset classes, enhancing PQDI’s diversification benefits.

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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.