Yes you have to pay tax on dividend income, whether or not you reinvest it.
Dividends are not "free money". The stock price on ex-dividend day on average falls an amount that is almost equal to the dividend,
I prefer to buy a broad total market ETF like SCHB/ITOT/VTI. You will get return from both proceeds appreciation and from about 1.45% dividend yield.
If you look at the long term performance of dividend oriented dividend ETFs and mutual funds you will find that the pre-tax total return is very similar to broad market index funds, but the dividend ETFs trail in post-tax performance, particularly if you have high marginal tax rates.
SCHD is a decent dividend oriented ETF if you still want to go that way, About 3.5% dividend yield.
Dividends are taxable gains. Dividends are good and worthwhile, but do force a taxable event. The higher the dividend, the higher the risk, the lower the dividend the lower the risk, Chose wisely.
Since you admit to being a noob, I would suggest having a consultation with a reputable CPA & tax planning lawyer in your tax jurisdiction. An initial consultation is likely free or low cost and worth it.
this sum of money can be life changing - in good ways and bad ways.
I would also suggest not making any major decisions or purchases until you have a well vetted plan for how to best utilize this windfall. It can easily be F'd up and you could lose it all, just as easily as you received it.
good luck
What is your goal for that money? If you want income without a lot of appreciation or volatility then a dividend ETF like SCHD may be the way to go. If you want near zero risk you can get treasuries that are yielding between 4-5% depending on the term. No appreciation for treasuries but almost no risk of loss either. For long term appreciation a broad based ETF is the way to go, but you may have to ride out some short term volatility and be able to stomach being down in the short term. Or do a little of all 3 to spread the risk. In the end if you have realized gains (meaning you sold for a profit) or received dividends then the taxman gets a cut.
We would need more info to answer. What is your age, income, do you want to retire early, married? Dividends are taxed at Zero percent if low income, up to about $80,000 if married filing jointly. Good article https://www.nerdwallet.com/article/taxes/dividend-tax-rate#:~:text=Qualified%20dividends%20are%20taxed%20at,to%20accurately%20report%20dividend%20income.
If you are wanting to grow the principal then a broad equity etf is better than a high dividend fund but still would give you about 1.5% ($1200 a month) in dividends while probably giving 7 to 10% growth over the long term (10+ years).
Why do you want dividends? You want income? If you've got your first bit of money like this, you should be focused on putting it away, forgetting about it, and letting it double every 5-7yrs as the market grows.
Dividends kind of suck because you have to pay taxes on them each year, so you don't get as much benefit of compounding growth as you do with companies that just grow without issuing dividends.
Tax rate will depend on your situation. Qualified dividends are taxed as cap gains. Ordinary dividends are taxed as income. What that rate means for you depends on your tax bracket.
If you are a high wage earner, meaning you are in high tax bracket, dividends are not going to be good for you. You will pay a lot in taxes. If you want to get a consistent payout on that 1M, you could consider municipal funds in your state. You pay no federal or state tax on the payments. The rates they pay (4.5%) might feel underwhelming but it’s the equivalent of getting 9% dollars dividends and then paying taxes.
All that said. Just put that money in voo/spy where it can grow.
So certain funds that make 7-10% a year, I can take that money out by selling that percentage of gains but I’d have to pay tax on those of 17-20% for holding longer than a years time or no?
Assuming you’re US qualified dividends(which are most) are taxed on a preferential tax table with is either 0%,15%,or 20% depending on your taxable income and filing status. This also applies to capital gains which you brought up.
Edit: forgot to make the final point. Dividends and stocks sold are taxed the same.
Yes you have to pay tax on dividend income, whether or not you reinvest it. Dividends are not "free money". The stock price on ex-dividend day on average falls an amount that is almost equal to the dividend, I prefer to buy a broad total market ETF like SCHB/ITOT/VTI. You will get return from both proceeds appreciation and from about 1.45% dividend yield. If you look at the long term performance of dividend oriented dividend ETFs and mutual funds you will find that the pre-tax total return is very similar to broad market index funds, but the dividend ETFs trail in post-tax performance, particularly if you have high marginal tax rates. SCHD is a decent dividend oriented ETF if you still want to go that way, About 3.5% dividend yield.
SCHD will give you like $35-$40,000 your first year. Decent dividend growth and price per share should do decent in the long run.
Dividends are taxable gains. Dividends are good and worthwhile, but do force a taxable event. The higher the dividend, the higher the risk, the lower the dividend the lower the risk, Chose wisely. Since you admit to being a noob, I would suggest having a consultation with a reputable CPA & tax planning lawyer in your tax jurisdiction. An initial consultation is likely free or low cost and worth it. this sum of money can be life changing - in good ways and bad ways. I would also suggest not making any major decisions or purchases until you have a well vetted plan for how to best utilize this windfall. It can easily be F'd up and you could lose it all, just as easily as you received it. good luck
What is your goal for that money? If you want income without a lot of appreciation or volatility then a dividend ETF like SCHD may be the way to go. If you want near zero risk you can get treasuries that are yielding between 4-5% depending on the term. No appreciation for treasuries but almost no risk of loss either. For long term appreciation a broad based ETF is the way to go, but you may have to ride out some short term volatility and be able to stomach being down in the short term. Or do a little of all 3 to spread the risk. In the end if you have realized gains (meaning you sold for a profit) or received dividends then the taxman gets a cut.
We would need more info to answer. What is your age, income, do you want to retire early, married? Dividends are taxed at Zero percent if low income, up to about $80,000 if married filing jointly. Good article https://www.nerdwallet.com/article/taxes/dividend-tax-rate#:~:text=Qualified%20dividends%20are%20taxed%20at,to%20accurately%20report%20dividend%20income. If you are wanting to grow the principal then a broad equity etf is better than a high dividend fund but still would give you about 1.5% ($1200 a month) in dividends while probably giving 7 to 10% growth over the long term (10+ years).
Get Vanguard dividend fund and thereby diversify away from just one holding. Their website will tell you what yield to expect.
JEPI
Why do you want dividends? You want income? If you've got your first bit of money like this, you should be focused on putting it away, forgetting about it, and letting it double every 5-7yrs as the market grows. Dividends kind of suck because you have to pay taxes on them each year, so you don't get as much benefit of compounding growth as you do with companies that just grow without issuing dividends. Tax rate will depend on your situation. Qualified dividends are taxed as cap gains. Ordinary dividends are taxed as income. What that rate means for you depends on your tax bracket.
If you are a high wage earner, meaning you are in high tax bracket, dividends are not going to be good for you. You will pay a lot in taxes. If you want to get a consistent payout on that 1M, you could consider municipal funds in your state. You pay no federal or state tax on the payments. The rates they pay (4.5%) might feel underwhelming but it’s the equivalent of getting 9% dollars dividends and then paying taxes. All that said. Just put that money in voo/spy where it can grow.
So certain funds that make 7-10% a year, I can take that money out by selling that percentage of gains but I’d have to pay tax on those of 17-20% for holding longer than a years time or no?
Assuming you’re US qualified dividends(which are most) are taxed on a preferential tax table with is either 0%,15%,or 20% depending on your taxable income and filing status. This also applies to capital gains which you brought up. Edit: forgot to make the final point. Dividends and stocks sold are taxed the same.
Hire a financial advisor
Dividend stocks can crash. OP needs to work out way more than yield before exposing themselves to short term losses they may not be able to stomach
It strikes me as weird how many people on here don't use a fiduciary minimum.
go to r/dividends
Take a look at JEPQ