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3muttsmom wrote:
Okay, I'm a CPA, but clearly I'm confused. I've never heard of companies paying dividends to creditors. My understanding is that dividends are a distribution of earnings to owners, i.e. stockholders.

You are correct.

Individual bonds pay a 'coupon', which is really interest, not a dividend. The IRS treats interest income differently than dividend income. Interest income is taxed at your marginal rate, while dividend income is taxed at the same rate as long term capital gains.

Bond funds distribute what are sometimes called 'dividends' in addition to possible capital gains. In this case, the 'dividends' are non-qualified meaning they are not qualified for the 15% maximum tax, and are taxed at your marginal rate, so they are really interest regardless of the name.

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