Domestic Diversions

Why Dividends Matter

Dividend-paying stocks have appealed to investors since the beginning of equity investing. Historically investors judged a company’s dividend yield as a predicatable and tangible return compared with the uncertainties of earnings growth. Moreover, it used to be that investors could exempt a portion of those dividends for tax purposes.

Over time, however, tax legislation changed to favor returning money to shareholders in the form of share repurchases rather than as dividends. As a result, more and more major U.S. corporations began significantly reducing dividend payouts. Understandably, investors lost enthusiasm for dividend-paying equities.

Today, dividends have once again entered the limelight with the passing of the Jobs and Growth Tax Relief Reconciliation Act of 2003.

Under the provisions of this legislation, qualifying dividend income received by individual taxpayers is now taxed at the same level as long-term capital gains, which reach a maximum of 15 percent. This compares to federal income tax rates of up to 35 percent on interest on interest income from taxable bonds and non-qualifying dividend income. So for many investors, this change could cut dividend taxes by more than half!Report: Why Dividends Matter and How it Affects Mutual Funds


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