What's not to Like about Dividends?

While most low-risk investments provide paltry interest rates, the dividend yields on stocks in solid companies can be very attractive.

In return for your ownership of a piece of the company, the company gives you a share of the profits. At one time, dividends, not stock price increases, were the primary reason to own stocks. Even today, savvy investors can take advantage of generous yields offered by some very profitable companies. For a list, use the stock screener at Morningstar.com.

With most low-risk investments providing paltry interest rates, the dividend yields on some stocks in solid companies can be very attractive. Pharmaceutical giants like Eli Lilly and AstraZeneca are paying dividends of more than 5% and stocks of many other well-known companies are offering a dividend yield of more than 4%.

That’s compared to an interest rate on the 10-year Treasury bond that’s hovering around 3.7%. There’s a bonus, too — dividend income is taxed at a maximum of 15%, similar to capital gains, and taxpayers in the 10% and 15% brackets pay no tax at all on dividends.

That’s a thorn in an otherwise rosy picture. Unless Congress acts to extend them, the tax breaks on dividend income, which were part of the Bush tax cuts, will expire at the end of this year. Without an extension, dividends will be taxed as ordinary income next year. That, combined with the possible return to the pre-tax-cut brackets, means that taxpayers in the 28% tax bracket would see the tax on their dividend income jump from 15% to 28%.