If you are looking to invest in a portfolio that will earn you reliable returns, exchange traded funds (ETFs) are worth your consideration. Owners of ETFs receive dividends which may be paid at regular intervals such as monthly, quarterly, half-yearly depending on the terms of the ETF you hold. As you plan to invest in ETFs, it is important to note that not all ETFs are treated the same when it comes to dividends when observed from a tax perspective.
Types of Dividends of ETFs
ETFs have two common types of dividends that may be issued to investors namely qualified and non-qualified dividends.
Qualified Dividends
What this means is that the dividends issued to investors under this category of best income ETF are taxable at the rate applicable to capital gains. This will depend on the modified adjusted gross income or MAGI and taxable income rate of up to 20%. It is a must that the investor must hold the ETF for more than 2 months during the 121-day period that commences 60 days before the ex-dividend date.
Non-qualified Dividends
They are not flagged as qualified because tax may have been payable on the stocks held under the ETF for 60 days. Subsequently, they are usually taxed at ordinary rates. They are equal to the total dividends minus any other dividends that have been classified as qualified dividends. It is worth noting that whereas qualified dividends are subject to a tax similar to capital gains, they are not utilized in clearing any capital losses.
ETF distributions other than Dividends
The distributions other dividends on ETFs may not be qualified depending o the type of ETF held. Below are some of the additional distributions that may arise from ETFs:
Fixed-income ETFs usually pay interest as opposed to dividends
Real east investment trust (REIT) exchange traded funds yield non-qualified dividends. However, a portion of them may be qualified.
Dividend ETFs
This is an ETF that is composed of dividends paying stocks that are trackable using an index. This type of ETF pays dividends to investors that can be classified as qualified or non-qualified depending on the ETF.
Can You Re-invest ETF Dividends
Like ordinary dividends, returns on ETFs can be used to purchase more shares in the same ETF. However, commissions may apply when re-investing dividends from ETFs. Therefore, it is advisable to check with your broker with which you hold your ETFs for more information regarding re-investments. Let an experienced broker help you select the best income ETF that can help you increase ROI.
