The Mutual Fund Exchange

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Some mutual funds have the word "dividend" in their name,
indicating that they invest in the stocks of companies
that pay above-average dividends or increasing dividends.
While the stocks in the S&P 500 now have an average yield
under 2 percent, some dividend-oriented funds yield 3
percent, 4 percent, or more.

When these dividends are passed through to fund investors,
the top tax rate is usually 15 percent In addition, the
rate is only 5 percent for investors in the bottom two tax
brackets.

In 2006, married couples with taxable income up to $61,300
will pay only 5 percent on stock dividends, including those
passed through by mutual funds. Many retired couples will
be in that income group so dividend-paying stock funds can
be a good source of tax-advantaged cash flow.

Even better, in 2008 most dividends will be exempt from
federal income tax, for taxpayers in the bottom two brackets.
In that year, holding dividend-paying stocks and stock funds
will be a prime tax shelter.