How Investors Can Leverage Constructive Return of Capital Distributions

Return of capital (ROC) or nondividend distributions are among the least understood type of distribution that investors receive. This is largely because an ROC distribution is a tax concept and not an economic concept, meaning that it tells an investor little about whether the distribution was earned but rather how the IRS will classify this distribution.

Put simply, ROC distributions are cash payments to shareholders that represent a return of invested capital that are not subject to current tax. ROC distributions can be either constructive or destructive depending on whether they are supported by total returns. However, this is not unique to ROC distributions as dividend and capital gains distributions may also be earned or unearned.

Earned ROC distributions that have a high likelihood of remaining earned into the future can offer investors significant benefits from a tax perspective.