Atypical trade-off for most high-yield investments is that they pay non-tax-qualified dividends, which would be taxed at your marginal income tax rate. Not a lot of investors know that there is a way (outside of qualified retirement accounts) to earn tax-advantaged, high-yield dividends.

The benefits can be substantial.

So let me show you how to do it…

Stock dividends can be tax-qualified or not. Regular corporations pay qualified dividends. The dividends are taxed at a lower rate because the companies pay corporate income taxes. Qualified dividends are taxed at a 20% rate. Non-qualified, or ordinary dividends are taxed at your regular income tax rate, up to 37%. And that’s just federal income tax—state tax can pile on top of this!

Ordinary dividends are paid by real estate investment trusts (REITs) and business development companies (BDCs), which operate as pass-through entities. They don’t pay corporate income tax if they pay out at least 90% of their income as dividends.

To summarize: qualified dividends are taxed at a lower rate because the companies pay corporate income tax. Ordinary dividends are taxed at a higher rate because the paying companies don’t pay corporate income tax.

Then we get to…

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