Distribution vs Dividend: Key Differences - SmartAsset (2024)

Investors not only seekcapital appreciationfrom the securities they buy, but they sometimes also pick securities for the income they provide. Such income can come in the form of dividends and distributions. Some may think that dividends and distributions are interchangeable terms for these payouts, but they are very different. Understanding where these two forms of income differ can help investors navigate future investment options. Here are some of the main differences between dividends and distributions. A financial advisor can provide valuable insight into which type of fixed-income investments are the best fit for your goals, timeline and risk profile.

What Is a Dividend?

Purchasing a share of a stock makes you the partial owner of a corporation. When that happens, you can earn a payment from the company’s profits, known as a dividend. Generally, dividends are the most typical form of cash payment made byC corporations, typically large businesses whose shares trade on major stock exchanges, such as the New York Stock Exchange and the NASDAQ.

Companies may not always choose to pay out dividends. Instead, they can decide to hold on to the money and put it towards something within the company. That way, it has the opportunity to fund internal growth or future operations.

There are also different forms of dividends. Cash dividends are usually the most popular type, but there are also stock dividends, property dividends, scrip dividends and liquidating dividends.

The IRS views dividends as separate from the actual share of the company. Instead, the IRS treats it as a portion of the company’s profits. So, dividends don’t factor into the stock’s original cost.

What Is a Distribution?

Unlike a dividend, a distribution is a cash disbursem*nt from a mutual fund or small business that is organized as an S corporation. In the U.S. such corporations can have no more than 100 owners or shareholders, all of whom are U.S. residents. Plus, they can only have a single class of shareholder.

S corporations, which are a type of pass-through entity, forward their income, deductions, losses and credits directly through to their shareholders. Those who hold these shares then report the flow-through of income and losses on their own tax returns, where they are assessed at the individual shareholder’s rate.The IRS treats distributions as a payout of company equity and thus are used to calculate the cost basis of an investment.

Distribution vs Dividend: Taxation

Payouts from S Corporations and C corporations are taxed differently.

Dividends from C corporations, which file Form 1120 tax returns, are taxed twice. Firstly, the company’s profits are taxed. Secondly, the disbursem*nt of these profits as dividends is made with after-tax money and shareholders who receive these dividends must pay taxes on the dividends they have received. This is known as double taxation.

Sometimes dividends may become eligible as qualified dividends. In this case, they are up for taxation at a lower capital gains rate. Capital gain dividends also break into two categories: long and short term.Long-term capital gains operate under standard capital gain tax rates. In contrast, short-term capital gains are included under ordinary income.

Generally, S corporations, which file Form 1120-S tax returns (or another form identified with closely held businesses), don’t pay any income taxes. Instead, taxation occurs on the shareholders’ level. So, if you own shares of an S corporation, then you are taxed on your allocated share of the profits from the business, i.e., your distribution.

The particulars of the taxation for the shareholder that receives a distribution depend on the nature of that income. If it’s standard income, then you pay standard income tax rates as part of your individual tax liability. You report this type of income via Form 1040. However, if the distribution is considered capital gains (or dividends accumulated when an S corporations was a C corporation) then the shareholder pays at a lower tax rate.

Distribution vs Dividend: What Is a Yield?

The term “yield” typically refers to the income an investment earns. This is usually expressed as a percentage.Dividend yields are percentages calculated when you divide the overall yearly dividend payments that a shareholder earns by the stock’s current share price. In general, a good dividend yield sits around 2% to 6%, but various factors can sway that number higher or lower. Moreover, those numerous influences can also make it complicated to decide what qualifies as a good dividend yield.

Similarly, a distribution yield also measures the cash payout for a shareholder. For a distribution yield, you annualize the most recent distribution and divide that by the net asset value (NAV) of the investment at the moment of payment.

There are a number of investors who purchase stocks from certain companies regardless of increases in their stock price. They are more interested in the companies’ reliable dividend payout and the history of yearly increases that comes with it. These corporations are called Dividend Aristocrats, and they earn a spot on the S&P 500 index for paying and increasing their base dividend annually for a minimum of 25 consecutive years.

By calculating the yields on these Dividend Aristocrats or any valuable investments for distributions, investors can decide which shares are worth purchasing.

The Bottom Line

A dividend is a payment from a C corporation, usually in the form of cash or additional shares. A distribution, on the other hand, is a payment from a mutual fund or S corporation, always in the form of cash. Dividends are paid with after-tax money – thus they are double taxed; distributions are paid with before-tax money – thus they avoid being double taxed. The IRS treats distributions as a payout of company equity.

Tips on Investing

  • If you’re interested in adding dividend income to your investment strategy, you may not know where to start. A financial advisor is one answer to such a dilemma. SmartAsset offers a free matching tool that can help you get in contact with up to three local advisors in only minutes. Once you find the one best suited for your needs and situation, they can help walk you through the process. If you’re ready, get started now.
  • While your main goal may be to find the investment with the strongest dividend yield or distribution yield, it’s important to keep in mind the risk level of every investment. Prioritize your pre-established risk tolerance before looking for specific returns. If you want greater returns or more income, consider reevaluating your portfolio, its strategies and goals first.

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Distribution vs Dividend: Key Differences - SmartAsset (2024)


Distribution vs Dividend: Key Differences - SmartAsset? ›

A dividend is a payment from a C corporation, usually in the form of cash or additional shares. A distribution, on the other hand, is a payment from a mutual fund or S corporation, always in the form of cash.

What is the difference between dividend and distribution? ›

Essentially investors receive dividends when they're invested in individual shares. They receive distributions when they're invested in ETFs.

What is the difference between distribution rate and dividend yield? ›

A distribution yield evaluates a shareholder's cash payout in a similar manner. A dividend yield is calculated by annualizing the most recent distribution and dividing it by the investment's net asset value (NAV) at the time of payment.

What is the difference between a dividend distribution and a non dividend distribution? ›

Dividends are a share of corporate or mutual fund profits paid out to shareholders. While most dividend distributions are taxable (some at lower rates than others), sometimes a portion of a distribution to shareholders is a nontaxable return of capital. These are also called nondividend distributions.

What is the difference between cash dividends and dividends? ›

A cash dividend is a payment made by a company to its shareholders in the form of cash, usually from the company's profits. On the other hand, a stock dividend involves distributing additional shares of the company's stock to existing shareholders instead of cash.

What is an example of a dividend distribution? ›

A stock dividend is a payment to shareholders that consists of additional shares rather than cash. The distributions are paid in fractions per existing share. For example, if a company issues a stock dividend of 5%, it will pay 0.05 shares for every share owned by a shareholder.

Do dividends have to be distributed equally? ›

You should distribute dividends equally and transparently. Avoid using them to discriminate against shareholders or deviate from your constitution, shareholders agreement, or dividend policy.

What is the difference between a dividend and a long term gain distribution? ›

Long-term capital gain distributions are taxed at long-term capital gains tax rates; distributions from short-term capital gains and net investment income (interest and dividends) are taxed as dividends at ordinary income tax rates.

How are distributions taxed? ›

Every dollar you earn as a distribution, rather than salary, is taxed as ordinary income. In most cases, that means a lower tax rate.

Is distribution the same as dividend LLC? ›

Unlike corporate shareholders, LLC members are not entitled to receive dividends. Instead, payments from an LLC are known as distributions, and whether distributions are made, and what amount they are when they are made, depends on the terms of the LLC's operating agreement.

Why are distributions not taxed? ›

Distributions are a payout of your business's equity to you and other owners. That means they can come from the accumulated profits or from money that was previously invested in the business and are not factored into how much a business owner is taxed.

Are all corporate distributions considered dividends? ›

Distributions that qualify as a return of capital aren't dividends. A return of capital is a return of some or all of your investment in the stock of the company.

How are distributions paid? ›

Dividends typically are credited to a brokerage account or paid in the form of a dividend check. The dividend check is mailed to stockholders but can be direct-deposited to a shareholder's account of choice, if preferred. The alternative to cash dividends is additional shares of stock.

Why would a company not pay dividends? ›

Firms pay no dividends due to cash constraints and investment opportunities. Firms do not pay dividends because of poor profitability and earnings. Firms avoid paying dividends due to the cost of raising external funds.

Is it better to reinvest dividends or cash? ›

It May Take Longer To Achieve Long-Term Financial Goals: Dividend reinvestment leads to compounded growth. This makes it easier (and faster) to achieve your long-term financial goals versus keeping cash in a savings account.

Can you cash out dividends? ›

Dividends can be paid out in cash, by check or electronic transfer, or in stock, with the company distributing more shares to the investor. Cash dividends provide investors income, but come with tax consequences; they also cause the company's share price to drop.

Is a distribution always a dividend? ›

The Bottom Line. A dividend is a payment from a C corporation, usually in the form of cash or additional shares. A distribution, on the other hand, is a payment from a mutual fund or S corporation, always in the form of cash.

What is a distribution payment? ›

Distributions are a payout of your business's equity to you and other owners. That means they can come from the accumulated profits or from money that was previously invested in the business and are not factored into how much a business owner is taxed.

How are dividends and distributions taxed? ›

Qualified dividends are taxed at 0%, 15% or 20% depending on taxable income and filing status. Nonqualified dividends are taxed as income at rates up to 37%. IRS form 1099-DIV helps taxpayers to accurately report dividend income.

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