Calculations

a. You only pay taxes on realized income, not unrealized income. Your before tax return is:

(55 – 50 + 1.5) / 50 or 13.0%

b. Your after-tax return would include the unrealized capital gains and the dividend after you paid taxes. Since this is a stock dividend, it is taxed at the preferential rate of 15 percent. The after-tax return is:

(55 – 50 + [1.50 * (1 - .15)]) = 12.55%

Of the $1.50 dividends, you paid 22.5 cents in taxes, and you keep the remaining amount.

 

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