The IRS Takes Up to 37% of These 5 High-Yield Dividends (Unless You Move Them)
REITs and BDCs hand you some of the fattest yields on the market, but your brokerage account may be quietly splitting those payouts with the IRS every single year. Where you hold these five positions matters almost as much as…
Most of what a REIT or business development company pays you is taxed as ordinary income. In the top 37% federal bracket, that means the IRS takes more than a third of each payout. The 37% rate only applies to income that falls inside the top bracket. Most readers are in lower brackets and pay less, but every bracket loses something. At 24%, a portfolio that throws off $50,000 in dividends sends $12,000 to the IRS every year.
Qualified dividends get capital gain rates of 0%, 15%, or 20%. REIT and BDC distributions generally don’t qualify, so they’re taxed at your marginal rate. Even REIT short-term capital gain distributions are reported as ordinary dividends on Form 1099-DIV. REIT dividends may be eligible for the 26 U.S.C. § 199A deduction, which reduces the tax. The figures below use the full marginal rate. On top of that, a 3.8% net investment income tax can apply above income thresholds that depend on filing status.
$500,000 Split Five Ways: Roth Versus Taxable
This example puts $100,000 into each of the five stocks below. Yields are based on each company’s forward dividend and the latest share price.
| Stock | Yield | Annual Income |
|---|---|---|
| Realty Income (NYSE:O) | 5.7% | $5,720 |
| Ares Capital (NASDAQ:ARCC | ARCC Price Prediction) | 10.2% | $10,210 |
| Main Street Capital (NYSE:MAIN) | 5.8% | $5,780 |
| W. P. Carey (NYSE:WPC) | 6.0% | $6,020 |
| EPR Properties (NYSE:EPR) | 6.5% | $6,500 |
Together they pay $34,240 a year. In a taxable account at 24%, you pay $8,220 in tax and keep $26,020. In a Roth, you keep all $34,240. That’s a gap of $8,220 a year, or $82,170 over 10 years before any growth.
Realty Income Pays Monthly, and So Does Your Tax Bill
Realty Income is a net lease REIT that owns over 15,500 properties. Its forward dividend of $3.258 per share is well covered by 2026 AFFO guidance of $4.44-$4.45. The main risk is concentration: retail makes up 78.3% of its rent.
Ares Capital Loses the Most to Tax
Ares Capital is the largest BDC and the only ultra-high-yield name in this group above 10%. That makes it the stock that benefits most from Roth placement. Its core earnings of $0.46 per share fell short of the $0.48 dividend last quarter. The company has $1.37 per share of undistributed taxable income from prior years to cover the gap. The risk: most of its loans are floating-rate, so earnings drop when base rates fall.
Main Street Capital Adds Bonus Payouts on Top
Main Street Capital yields 5.8% on its regular dividend alone. It also pays a quarterly supplemental of $0.30, and all of it is taxed as ordinary income in a taxable account. Q2 distributable net investment income before taxes was $1.08 per share, and management expects at least $0.97 for Q3. The risk: the supplementals depend partly on realized gains, which vary.
W. P. Carey Covers Its Dividend With Room to Spare
W. P. Carey pays $3.80 a year, covered by AFFO guidance of $5.23-$5.29. The risk: Europe makes up 33% of its rent, so currency moves affect results.
EPR Properties Has the Widest Coverage Cushion
EPR Properties is a REIT that owns entertainment and leisure properties. It paid out 65% of AFFO in Q2, and its tenants’ coverage stands at 2.1x. The risk: theaters still make up 34% of its rent.
Your Bracket Sets the Cost of Holding These in a Taxable Account
| Bracket | Taxable Net | Annual Roth Advantage |
|---|---|---|
| 22% | $26,710 | $7,530 |
| 24% | $26,020 | $8,220 |
| 32% | $23,280 | $10,960 |
| 37% | $21,570 | $12,670 |
Compounding Turns $8,220 a Year Into $244,690
Suppose the $8,220 you’d otherwise pay in tax each year is reinvested at a conservative 4%. After 10 years it reaches $98,660. After 20 years it reaches $244,690. At 37%, the 20-year figure is $377,230. This measures the tax cost only.
A Roth changes when and how you’re taxed. Withdrawals are tax-free only if they’re qualified distributions. That means they come after the 5-year period and meet one of these conditions: you’re 59½ or older, you’re disabled, the money goes to a beneficiary, or it’s a first-home purchase capped at $10,000 over your lifetime. Any amount you convert is added to your taxable income for that year, which is why the quiet years between your last paycheck and your first RMD matter so much (we sized up that low-bracket conversion window in a free guide).
What to Do Before Your Next Filing
- On your 1099-DIV, compare box 1a (total ordinary dividends) with box 1b (qualified dividends). The difference is income taxed at your full marginal rate.
- Run the conversion math on Ares Capital first. Its yield is the highest of the five, so it loses the most to tax each year.
- A phased Roth conversion can be modeled that moves the ordinary-income assets first and compares the result with keeping the qualified-dividend stocks in a taxable account.
The tax on these payouts comes due every year they sit in a taxable account. Work out the cost at your own bracket now and decide what you’re willing to pay for convenience.
Contact [email protected] for any questions or corrections.
Lee Jackson has covered Wall Street analysts' equity and debt research and equity strategy daily for 24/7 Wall St. since 2012. His broad, diverse career, including a stint as creative services director at an NBC affiliate in Austin, Texas, gives him unique insight into the financial industry.
Lee Jackson's journey in the financial industry spans more than 30 years, including nearly two decades as an institutional equity salesperson at Bear Stearns, Lehman Brothers, and Morgan Stanley. His career spanned pivotal sell-side Wall Street events, from the dot-com rise and bubble to the Long-Term Capital Management debacle, 9/11, and the Great Recession of 2008. This reflects his resilience and adaptability amid market volatility.
Lee Jackson’s practical financial industry experience, gained through a career at some of the biggest banks and brokerage firms, is complemented by a lifetime of writing across various platforms. This unique combination allows him to shed light on the intricacies of Wall Street in a way only someone with deep insider experience and knowledge can. Moreover, his extensive network across Wall Street continues to provide direct access for him and 24/7 Wall St., a privilege few firms enjoy.
Since 2012, Jackson’s work for 24/7 Wall St. has been featured in Barron’s, Yahoo Finance, MarketWatch, Business Insider, TradingView, Real Money, The Street, Seeking Alpha, Benzinga, and other media outlets. He attended the prestigious Cranbrook Schools in Bloomfield Hills, Michigan, and has a degree in broadcasting from the Specs Howard School of Media Arts.
