Most investors only look at the top-line yield. But the IRS treats dividends differently based on their source. A 10% yield from a Covered Call ETF (Ordinary Income) puts less money in your pocket than a 7% yield from a Qualified Dividend payer.
The 3 Buckets of Income
Ordinary Income: Taxed at your marginal rate (up to 37%). Includes Bonds, REITs, and most Covered Call ETFs (JEPI).
Qualified Dividends: Taxed at favorable capital gains rates (0%, 15%, or 20%). Includes standard stocks (SCHD, KO).
Return of Capital: Not taxed today. Reduces your cost basis. Tax is deferred until you sell. Includes some MLPs and Option strategies (SPYI).
This article was last audited by our Research Team on 2026-01-10. We cross-reference all yield data with official prospectus filings and FactSet. Unlike automated screeners, we manually verify "Return of Capital" classifications to ensure your tax-efficiency data is accurate.
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DivAgent does not accept payment from ETF issuers, fund managers, or public companies to feature their products. Our Risk Tier Ratings (Tier 1 to Tier 5) are mathematically derived from volatility and drawdown metrics, not editorial opinion.
*Disclaimer: This content is for educational purposes only. Dividend yields are backward-looking and heavily influenced by share price movement. Past performance of a covered call strategy does not guarantee future results. Always consult a generic financial advisor before making portfolio decisions.