For many investors, dividends are an important — if not the most important — component of investment returns. Dividends can be earned in a wide variety of ways. An investor who thinks only of stock shares when thinking of dividends may want to pursue some different types of investments for dividend income.
The shares of stock trading on the stock exchanges are common stock share ownership of corporations. Dividends paid on a common stock are a portion of the corporation's profits paid out to shareholders. Each company decides how much and when to pay dividends. Some companies pay regular dividends and others have variable dividend policies. A corporation can elect to change its dividend policy at any time and increase, decrease or eliminate the dividend. Dividends paid on common stock of corporations qualify for lower tax rates for investors.
REIT and MLP Shares
A real estate investment trust — REIT — and master limited partnership — MLP — are different types of companies with shares that trade on the stock markets and pay regular dividends. These companies are not corporations, and different tax rules apply to the dividends received from an REIT or MLP. Both types of investments typically pay out a greater percentage of earnings as dividends when compared with corporations. A REIT company is required by law to pay out at least 90 percent of net income as dividends to investors. The majority of MLP companies are involved in the production or transport of energy products.
Preferred shares get the name because this type of share has preference over common shares when the issuing company pays dividends. Both corporations and REIT-type companies can issue preferred shares. Most preferred share issues pay a fixed dividend rate, and the dividend must be paid before the company can pay any common stock dividends. Preferred stock shares provide an attractive yield and a steady dividend. Dividends from the preferred stock of a corporation also qualify for the lower dividend tax rate.
The different types of investment companies — mutual funds, closed-end funds, unit investment trusts and exchange traded funds, ETFs — all pay out income earnings to investors in the form of dividends. A fund of any type is required to pass through portfolio earnings — whether from stocks or bonds — to shareholders as dividends. The tax status of the dividends from a fund depends on the type of securities held by the fund. Funds allow investors to earn dividends from a wide range of investment types, including stocks, high-yield bonds, government bonds and tax-free bonds.