Recently, I opened up my brokerage statement for this tax year (2017).  One section of the statement was a 1099-DIV for my taxable Portfolio, showing a breakdown of the 2017 distributions for the stocks in my Portfolio.  I saw mostly dividend distributions, as expected.  However, there were also capital gains distributions, and non-dividend distributions.  Quite the variety!

It doesn’t stop there either, as some of those distribution categories were broken down even further.  For instance, the dividends were divided into qualified dividends and non-qualified dividends.  Qualified dividends receive better tax treatment (a lower tax rate), so non-qualified dividends result in more tax to pay.  Meanwhile, the capital gains distributions were divided into long-term capital gains, and unrecaptured Section 1250 gains (from certain depreciable real property).

Now to be fair, the majority of my stocks distributed qualified dividends, and those that didn’t were the expected ones (the REITs and the BDC).  Here are the stocks in my Portfolio that fit that profile:

REITs: Crown Castle International (CCI), Omega Healthcare Investors (OHI), Realty Income (O), and W.P. Carey (WPC)

BDC: Main Street Capital (MAIN)

However, there was one company that surprised me, providing a non-dividend distribution (or return of capital)… and that company was Qualcomm (QCOM).  More on this below.

Anyway, looking it all over, I found it interesting to see how the distributions were broken out…. interesting enough that I thought I’d share them with you, and also discuss my surprise non-dividend distribution.

Note – I’m only showing my Portfolio companies that made distributions that were not entirely qualified dividends.

 

Let’s See Those Portfolio Distributions

The numbers in the ‘total dist’ column (blue) are the total $ amount of all distributions made throughout the course of the year.

The numbers in the green columns are the various distribution categories.  Sum these up to get the amount in the ‘total dist’ column.

The columns to the right of each the distribution category (should they exist), are the subcategories for that distribution.  Sum these up to get the amount in the distribution category column.

For the REITs, the majority of my 2017 distributions were either non-qualified dividends or capital return.  The capital returns lower your cost basis in the stock.  This can often explain why your brokerage may show a lower cost basis for your REITs than you show (assuming you haven’t accounted for the capital returns during your holding period).

CCI had the most favorable distributions of all my REITs, actually providing a decent amount of qualified dividends and having no return of capital.

In the case of MAIN, my lone BDC, the majority of the distributions are non-qualified dividends or long-term capital gain.  No return of capital here.

An interesting tidbit about MAIN is that their January 2018 payment on 1/12/2018 is indicated as part of their 2017 distributions.  So, the MAIN payments for 2017 tax purposes included payments starting in February 2017 through January 2018.  I can’t say I’ve seen that before.

 

What’s Up With the QCOM Distribution?

As for QCOM, their first three “dividend” payments during 2017 got classified as a return of capital.  Only the final “dividend” payment of the year was actually a qualified dividend.  You can see the split in the table above.

The return of capital means no tax to pay on those distributions, but as mentioned before it lowers the cost basis of my shares, and thus I’ll pay the tax once I finally sell the shares.

I could not find any information on the QCOM website regarding why some of the 2017 dividend payments were declared to be a return of capital.

QCOM has posted on its website that it believes the first dividend payment in 2018 is going to be classified as a qualified dividend, but that one will have to confirm the classification of this payment, and the others for 2018, after the year comes to a close.

 

What Do I Make of This?

The tax treatment for my BDC looks like it will be better than those for my REITs based on the type of distributions made.

Among the REITs, the return of capital varied widely.  CCI didn’t return any capital, WPC returned about 13.0% of total distributions, O returned 21.7%, and OHI returned 36.7%.  I owned these stocks in 2016 as well, and the distribution category percentages were roughly equivalent to 2017 (although the OHI return of capital in 2016 was significantly smaller than in 2017).  Given this, I might conclude that one could look at the distributions in past years and have a decent idea of what to expect before even investing in a REIT or BDC.  This might allow you to optimize your tax situation if holding REITs or BDCs in taxable account.

As for stocks that normally pay qualified dividends, and then don’t for some reason, like QCOM did in 2017… I don’t suspect there’s much you can do, as you may not know about the atypical distributions until the corporate tax year is over.  Should the situation with QCOM’s distributions persist, then maybe I’ll consider finding an alternate stock that I can count on to deliver qualified dividends.

 

Did anything stand out to you during this closer look into “dividend” distributions?  Have you ever had any unexpected distribution classifications, like I did with QCOM?  Would this impact your decision to hold the stock?  Please share your thoughts in the Comments.