Distributions are Different Than Dividends

Just as a stock dividend isn’t really a dividend, not all “dividend-paying” stocks actually pay dividends. Partnerships, trusts, and REITs actually pay distributions. While distributions look and act like dividends in many respects (investors see cash arrive in their account every month, quarter, or half-year), these payouts are in fact quite different. Firstly, many of these companies get very favorable tax treatment, essentially paying no income tax — so long as they distribute a very large percentage of their earnings.

What’s more, certain types of partnerships are able to pass along or accelerate the recognition of certain costs. What this means is that a distribution may be composed of both cash earnings, but also what is called a “return of capital.” These payments can be subjected to significantly different tax treatments and advisors must understand the tax ramifications before advising clients to take large positions in such equities.

Source: Dividend.com

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