Dividend Is Always Good

Every quarter when dividend from various companies get posted to your account, it always gives a good feeling. Dividend paying Exchange Traded Funds, like DVY and PEY received lot of attention from investors in recent times. Mutual funds that care for 'dividends' have different kinds of approaches: Some just aim for high yield: T.Rowe Price Equity Income (PRFDX) is one such fund that tries to search for inexpensive but safe (relatively speaking) stocks with above-average yields. Some other mutual funds look for growth and income: like Fidelity Dividend Growth (FDGFX) which looks at dividends to be a good sign for a company's financial growth and an indication of its strong cash reserve.

The reduction of tax (to only 15%) on dividend income by Bush administration fuelled a strong growth and popularity of dividend-paying stocks. One caution is that not all stock or fund dividends qualify for the low rate of 15%. A stock must be held for 60 days before and after the payout date by you or by your mutual fund for the dividend to qualify for the low tax rate. In 2004, for example, only 86% of the dividends paid by iShares Dow Jones Select Dividend (DVY) whose current yield is about 3%, qualified for the lower rate.

You must also check the expense ratio of these dividend-yielding funds. Expenses silently consume your money and nullify some of the advantages of a dividend-yield. So, avoid any fund that has an expense ratio of more than 1%.