Do I pay taxes on dividends?

Yes, if the shares are in a regular taxable account. Every dividend paid to you during the year is income for that year, whether you took it as cash or had it reinvested. Your broker totals it up on Form 1099-DIV.

The rate depends on a technicality. Most dividends from US companies and many foreign ones are "qualified," which means they are taxed at the same favourable rates as long-term capital gains: 0, 15 or 20 percent, with most people at 15. To count as qualified, you also need to have held the shares for more than 60 days around the ex-dividend date. Dividends that do not qualify, including most from real estate trusts and money market funds, are taxed as ordinary income.

A $50,000 portfolio yielding 2 percent produces about $1,000 in dividends and, at the 15 percent rate, a $150 tax bill. Not large, but it accrues every year regardless of whether you sold anything, which is why some people prefer growth stocks in taxable accounts and dividend payers in retirement accounts.

Inside an IRA or 401(k), dividends are not taxed when paid. They simply reinvest and compound, and the tax question is settled at withdrawal, or never, in a Roth.