I lately dug into the professionals and cons of dividend reinvestment. Readers of the article despatched me questions on different dividend-related subjects. Listed here are a number of the most typical questions I acquired:

What ought to I learn about reinvested dividends and wash gross sales?

Reinvesting dividends means buying further shares, which may complicate gross sales or tax-loss harvesting in taxable accounts. The IRS’ wash-sale guidelines prohibit claiming a tax loss after a sale if you happen to’ve bought the identical or “considerably an identical” safety 30 days earlier than or after promoting. You might wait at the very least 30 days after a dividend earlier than promoting, and ensure to promote at the very least 30 days earlier than the subsequent dividend, however to cut back problem, it’s most likely finest to not reinvest dividends for holdings that you simply plan to promote quickly.

If I reinvest dividends, will I find yourself with fractional shares which might be tough to promote?

Reinvesting dividends sometimes means buying small quantities that get added to your present inventory/fund place. You’ll most likely find yourself with fractional shares, the place you personal solely a part of a share. Most main brokerages allow you to promote fractional shares, however you sometimes must promote fractional shares as a market order, and liquidating fractional shares might take a further day.

How are dividends taxed?

For shares and inventory funds, the tax charge will depend on whether or not the dividend is certified or nonqualified (additionally referred to as unusual). Dividends are certified if you happen to meet the 60-day holding requirement inside a 121-day window across the ex-dividend date; these are taxed at capital positive aspects charges — 0% or 15% for most individuals. Others are taxed as unusual revenue. Dividends from holdings that don’t meet these necessities are nonqualified and are taxed as unusual revenue.

Bond or bond fund funds are thought-about curiosity revenue and are sometimes taxed as unusual revenue. Revenue from Treasury bonds is exempt from state and native taxes, and revenue from municipal bonds is often exempt from federal, state, and native taxes, relying on the issuer’s location.

Are reinvested dividends taxable?

As I discussed in one other article, dividends for holdings in taxable accounts are taxable whether or not taken in money or reinvested. In the event you reinvest dividends, you’ll want so as to add every dividend to the holding’s price foundation. You might find yourself with many separate tax heaps with completely different cost-basis ranges. If you promote the inventory, you’ll must match every sale with a particular tax lot.

Are shares that pay dividends higher?

Cash is fungible — it doesn’t matter whether or not you obtain it as revenue or capital appreciation. An organization’s worth shouldn’t rely upon whether or not it pays a dividend. Nonetheless, behavioral finance researchers have discovered that many traders understand dividends as extra secure and predictable than capital positive aspects. Tax points are one other vital consideration.

How do dividend-oriented methods carry out in a recession?

Dividend shares traditionally maintain up nicely throughout financial slowdowns and may present draw back safety in drawdowns. Nonetheless, funds that target high-yield shares with out incorporating high quality screens are usually extra uncovered to economically delicate sectors, and corporations that won’t be capable to preserve paying dividends throughout recessions.

Can I dwell off my portfolio’s dividends and curiosity revenue in retirement?

Some traders like this strategy. Dividends can create regular revenue just like a daily paycheck, and plenty of traders like the thought of leaving their principal untouched. Nonetheless, it may be powerful to create a portfolio that generates sufficient yield for an income-only strategy, particularly one which retains tempo with inflation.

An income-only strategy to assist retirement spending may imply you’d must amass a bigger portfolio. By the identical token, an income-focused strategy means you’ll seemingly be underspending throughout retirement and may find yourself with a big portfolio stability after demise. That may attraction to retirees who’ve a robust curiosity in leaving a bequest, however limits your spending whilst you’re alive.

This text was supplied to The Related Press by Morningstar. For extra private finance content material, go to https://www.morningstar.com/personal-finance. Amy C. Arnott, CFA is a portfolio strategist for Morningstar.