Dividend Funds Enjoy Best of Times

Rewarding shareholders the old-fashioned way -- with dividends -- has made a comeback, thanks largely to investor tax breaks enacted in 2003.

But will presidential politics and federal budget constraints quickly lead to higher dividend tax rates again, just as dividend-paying stocks are getting some respect?

If ever there was a time for dividend stocks to shine, it's now, when rising interest rates are dampening the markets, and a company's genuine ability to generate cash flow every year produces real value for investors.

According to Morningstar, in the past five years, all dividend-based mutual funds handily outperformed the S&P 500, which has lost 16.24% on a total return basis. The top fund, (TGIGX Quote - Cramer on TGIGX - Stock Picks)TCW Galileo Dividend Focused N, even managed a double-digit gain, with a return of 11.19% (see chart).

Although we don't know who will win the presidential election, President George Bush and Democratic challenger Sen. John Kerry have different views on taxation.

President Bush entered office hoping to eliminate the tax on corporate dividends, viewing it as an unfair form of double taxation: Corporations are taxed on their profits, then shareholders are taxed again when they pay income tax on dividends, which are part of the corporation's profits.

He was able to reduce the dividend tax substantially, but only through 2008 because of congressional budget constraints applied to the tax act. Bush would like to make the lower taxes permanent in a second term, says Mark Luscombe, tax analyst with Chicago tax information company CCH Inc., a division of Amsterdam-based publisher Wolters Kluwer.

"Bush seems very loath to raise taxes," says Luscombe. "He's willing to let the deficit go up." A big part of Bush's touted "ownership society" is not penalizing savings, he added.

Top Dividend Mutual Funds Past Five Years
Fund	Ticker	Category	Five-Year Return	Inception Date
TCW Galileo Dividend Focused N	TGIGX	Large Value	11.19%	9/19/1986*
Franklin Rising Dividends A	FRDPX	Mid-Cap Value	9.77%	01/14/87
Delaware Dividend Income A	DDIAX	Moderate Allocation	7.66%	12/2/1996
Columbia Dividend Income T	GEQAX	Large Value	4.58%	03/02/98
Hartford Dividend & Growth A	IHGIX	Large Value	3.63%	07/22/96
S&P 500		Large Cap	-16.24%
*Includes results of predecessor fund to 2002. Source: Morningstar, Inc. (Returns through 9/13/04, yields through 8/31/04)