Real estate investment trust companies are among the best dividend-paying stocks. One reason for the nice REIT dividends is that these companies avoid income taxes at the corporate level if most of their income is paid out as dividends. However, the tax advantage of the REIT business form changes the tax nature of REIT dividends. With these stocks there is no holding period restriction to qualify for a lower tax rate.
Dividends you earn from shares of regular corporations can qualify for a lower tax rate, and these are referred to as qualified dividends. To pay less in taxes you must hold the shares for at least 60 days during the 121-day period centered on the ex-dividend date. To qualify for the lower tax rate, you must earn dividends from a company that pays qualified dividends, and you must meet the holding period requirement. These requirements don't apply to REIT dividends, because the tax status of a REIT means its dividends aren't qualified. You pay your regular marginal tax rate on dividends from REIT stocks.
Capturing REIT Dividends
To receive the dividend from any stock including a REIT, you must own the shares for just one day -- the record date. Each dividend announcement includes a record date and a payment date, when the cash will actually be paid. A stock goes ex-dividend two business days before the record date. To own stock or REIT shares on the record, you must buy before the ex-dividend date or at least three days before the record date. You can sell the stock on the ex-dividend date and you'll still be an official share owner on the record date and receive the dividend on the payment date.
Share Price Adjustments
Even though you need to own the REIT shares for only one day, it's not profitable to buy the day before and sell on the ex-dividend date. On the ex-dividend date the share price will start trading at the previous closing price minus the amount of the dividend. As a result, buying the day before and selling on the ex-dividend date would result in a no-profit trade, with the dividend received equal to the share value decline.
Holding Period For Profits
Even though there are no negative tax consequences from buying and holding REIT shares for just one day to collect the dividend, you need a longer investment period to profit from a REIT dividend capture strategy. After the stock goes ex-dividend, you must wait until the share price moves back up to purchase price before the ex-dividend date. Because REIT dividends are non-qualified, you don't need to worry about a 60-day holding period to save on taxes.