What are the potential tax implications for investors from a higher dividend?

Tax Implications of a Higher Dividend

MGE Energy’s 50‑year streak of dividend growth means investors will now receive a larger cash payout. In the United States, that extra dividend is taxed as ordinary income in the year it’s received. If the distribution meets the qualified‑dividend criteria (generally a U.S. corporation with a holding period of more than 60 days), it is taxed at the lower qualified‑dividend rates (0 %–20 % depending on the investor’s marginal tax bracket). If the dividend is non‑qualified, it is taxed at the investor’s ordinary income rate, which can be substantially higher for high‑income or marginal‑bracket taxpayers. State and local taxes also apply, so the net after‑tax yield may be lower than the headline 5‑%+ yield that the market is pricing in.

From a portfolio‑management perspective, the larger dividend can push an investor’s taxable income into a higher bracket, especially for those who rely heavily on dividend income. This may trigger phase‑outs of other tax‑benefit items (e.g., the 0 % capital‑gains rate, the 3.8 % net‑investment‑income tax, or the 25 % Medicare surtax on high‑income earners). Consequently, investors should:

1. Project the after‑tax yield using both qualified‑dividend and ordinary‑income scenarios to gauge the true cash‑flow benefit.
   
2. Consider tax‑loss harvesting or offsetting strategies (e.g., realizing capital losses) before the ex‑dividend date to neutralize the incremental tax hit.
   
3. Re‑balance exposure if the dividend increase materially changes the portfolio’s income profile—e.g., shifting a portion of the holding into tax‑advantaged accounts (IRA/401(k)) or swapping for growth‑oriented stocks to diversify the tax‑impact.

Actionable Takeaway: If you hold MGE in a taxable account, the higher dividend will raise your current‑year taxable income. Run a quick “after‑tax return” calculator to see whether the net yield still meets your target return. If the tax drag is significant, you may either trim the position before the ex‑dividend date or move new purchases into tax‑deferred accounts to preserve the pre‑tax yield advantage while limiting the immediate tax burden.