FAQ on Dividend Investing

When should I own shares to get the dividend ?

You must hold the stock on the ex-dividend date to be entitled to its cash dividend. You can sell the stock during that day, but you must own it at market opening to be elligeable to receive its dividend. In smartdividend.com, the Ex-Dividend date is always in the blue title of each entry, and in the black text is referred to as: "to holders as of date." More info.

I owned stock on the ex-dividend date. When will I get the cash?

The date where you will actually receive the cash dividend is called the "Payable Date". It can be a few days or a few weeks after the Ex-Dividend date. The body of any post on smartdividend.com will indicate the Payable date.

The payable date is sometimes before the ex-dividend date! How comes?

When the cash dividend is worth more than 25% of the stock value, the ex-dividend date is the business day AFTER the payable day. You still must own the stock at market opening on the ex-dividend date to get the distribution. If you sell on the payable day (this is, the business day before ex-dividend day), you will see the cash dividend paid to you then taken out of your brokerage account.

Will my outstanding limit orders be adjusted on ex-dividend day?

Yes, if you have placed GTC limit orders (buy or sell) before the ex-dividend day, these orders are adjusted downward by the dividend amount. Not all exchanges make this automatic adjustment, however. One example is the Toronto stock exchange. Options are another beast entirely, but they are also revalued. However, some brokers allow customers to add a Do Not Reduce (DNR) qualifier, preventing this adjustment.

Will my outstanding option orders be adjusted on ex-dividend day?

Yes, but the adjustment is not as straightforward as with outstanding GTC limit orders. The adjustment depends on what pricing model is used, whether it's a call or put, whether you are buying or selling, and whether the option is American or foreign.

What are "earning" dividends?

Earning dividends are dividends that are paid by companies out of their earnings. Most regular dividends by non-REIT corporations fall in this category. They are taxed as regular income, and qualify for the lower tax rate if you keep the shares long enough.

What are "return of capital" dividends?

Return of capital dividends are dividends paid by corporations out of their capital gains. Many "special" dividends and most dividends paid by REIT fall in this category. Special dividens can also include both an "earning" part and a "return of capital" part. Return of capital dividends are taxed as a capital gain at the time you sell.

How are dividend taxed?

It depends on what kind of dividend this is. Earning dividends are reported as part of your income and are taxed at either your normal tax rate or the lower qualified dividend tax rate, depending on how long you held the shares. Interest Dividends are always taxed as regular income, and do not qualify to the lower dividend tax rate. Return of capital dividends are taxed as a capital gain at the time you sell.

Can dividends be taxed at the special lower tax rate for dividend investment?

Yes, if this is an earning divident and you held the undelying stock long enough. To ensure that the dividend qualified for a lower 5% or 15% tax rate, the IRS requires you to hold the stock for at least 60 consecutive days within a 121-day larger window, spanning 60 days before and after the ex-dividend date. Otherwise, the dividend is taxed as regular income.

Can I rely on my 1099-DIV form to tell me if my dividends qualified for the special lower tax rate?

No, many broker's 1099-DIV forms include in box 1b all dividends that potentially qualify, even if you didn't hold the underlying stock long enough to qualify. It's your responsibility to report dividends as "non-qualifying" if you hadn't held the stock for 60 days (more info). On your 1099-DIV form, dividends are reported in two boxes. Box 1a lists total dividends paid to you by your broker. Box 1b lists the amount of dividends which potentially qualify for the lower tax rate.

What's the difference between Canadian and American Trusts?

American and Canadian trust are similar entity legally, but tend to operate differently. American trusts, particularly energy truts, aim at "milking" its assets through dividends. They usually avoid capital expenditures, nor do they tend to take on additional debt or equity financing. By comparison, Canadian trusts are often actively managed, will use debt and hedging, and are frequent and active acquirers. Thus, in many ways, Canadian trusts behave more like many limited partnerships than American-style trusts. The value of Canadian trust is somewhat tied to exchange rates, and the Canadian government has placed limitations on non-Canadian ownership. What's more, Canada takes additional taxes, such as a 15% foreign withholding. To compensate, those Canadian trusts that do trade in the U.S. often offer a higher yield. More about Canadian Trusts.