Mutual Fund Dividends

Ordinary dividends, or income dividends, are mutual fund earnings distributed to shareholders from the interest or stock dividends received by a mutual fund from its holdings. Funds pay these dividends monthly, quarterly, or semi-annually.

Funds whose objective is paying steady income to their shareholders invest primarily in bonds and dividend-paying stocks such as preferred stock and the common stock of utilities. Many such funds might have the word income in their names.

Income dividends from mutual funds are taxed as ordinary income. Municipal bond funds differ with respect to taxes: they pay dividends that are free of most federal taxes and sometimes even state taxes.

When a mutual fund sells shares of its holdings at a profit, it may pass this profit on to its shareholders as a capital gains dividend. Capital gains dividends frequently occur at the end of the year in many funds. You will be taxed at the short-term or the long-term rate depending on how long the fund held the shares.

Soon after a fund makes a dividend payment, it notifies shareholders with a dividend notice. The notice spells out the dividend's dollar value per share. If there is a capital gains dividend, it will specify the short- and long-term gain components.

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