Monthly Newsletter

November 2006

Tax Breaks for Dividend-Paying Stocks

 The new tax law extends the special tax treatment this afforded long-term capital gains and stock dividends through 2010.  Income from long-term gains and dividends will continue to be taxed no higher than 15%.

Taxpayers in the lowest two federal brackets will pay even less—only 5% on qualified dividends.  In 2006, this ultra low rate covers single filers with taxable income up to $30,650 ($61300 for married couples filing jointly).

Such low-bracket taxpayers will owe no tax on stock dividends and long-term gains received in 2008 through 2010.

For now, investors in all tax brackets are being encouraged by advisers to buy dividend-paying stocks and enjoy the tax benefit.

What many investors don’t realize:  Beyond the dividends, such stocks also have a history of generating higher long-term total return—price gain plus dividends—than non-dividend stocks, and with less volatility.

Bottom Line:  Investing in dividend-paying stocks can lead to higher returns as well as lower taxes.  You shouldn’t invest your entire portfolio in any one asset, but dividend-paying stocks might be considered for a significant part of your equity holdings.

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