What are ordinary dividends characterized as?

Ordinary dividends are defined as distributions made by corporations to their shareholders that are paid out of the corporation's earnings and profits. This characterization is important because it specifies the tax treatment of these dividends; they are included in the shareholder's ordinary income and taxed at the individual's ordinary income tax rates. This distinction ensures that shareholders are aware that these dividends are not tax-free and that they impact their taxable income for the year.

Understanding this helps clarify the nature of ordinary dividends in contrast to other types of dividends, such as qualified dividends, which may be taxed at a lower capital gains rate. This also highlights that ordinary dividends can be paid to any shareholder, not just those holding preferred stock, and are not limited to long-term investors alone. Thus, highlighting the proper categorization is essential for individuals preparing their tax returns or assessing their investment income.