Investors are relying on dividend-paying investments now more than ever to get the income they need. But many get confused about why there are so many different tax rates that apply to dividend investments.

In the following video, Dan Caplinger, The Motley Fool's director of investment planning, goes through the rules, pointing out that rates of 0%, 15%, or 20% can apply to qualified dividends on ordinary stocks that are eligible for preferential rates. These stocks include not only high-yielding Frontier Communications (NASDAQ:FTR) and other U.S. income-producing stocks but also U.S.-listed foreign stocks like BP (NYSE:BP). Dan also notes that Annaly Capital (NYSE:NLY), American Capital Agency (NASDAQ:AGNC), and other real-estate investment trusts often produce ordinary income because of their status as pass-through entities. Moreover, Dan goes through the taxation of Kinder Morgan Energy Partners (NYSE:KMP) and other master limited partnerships, which incur different types of taxes on their distributions because of the special rules applying to energy companies. Dan concludes that unless you use a tax-deferred account, keeping track of all these rates is important to make sure you know how much tax you'll have to pay.

Which dividend stocks are the best?
Regardless of taxation, dividend stocks are still a smart move for most investors. Indeed, one of the dirty secrets that few finance professionals will openly admit is that dividend stocks as a group handily outperform their non-dividend-paying brethren. However, knowing this is only half the battle. The other half is identifying which dividend stocks in particular are the best. With this in mind, our top analysts put together a free list of nine high-yielding stocks that should be in every income investor's portfolio. To learn the identity of these stocks instantly and for free, all you have to do is click here now.


Dan Caplinger and The Motley Fool have no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.