The proposal has not resulted in much attention for real estate investment trusts (REITs). Because REITs pay out the lion's share of their income as dividends, they are not taxed at the corporate level and would probably not be included in the Bush proposal. This could make them less attractive relative to other stocks that produce dividend income.
With interest in dividend-paying stocks piqued by their bear-market resilience and recent tax-related developments, mutual fund evaluation services have been showcasing their top-pick stock funds that pay high dividends. Morningstar Inc. of Chicago has created a list of four funds in this category that have strong management, low costs and proven track records: American Funds Washington Mutual, T. Rowe Price Equity-Income, Dodge & Cox Stock and Vanguard Equity Income.
A common denominator among all these funds is their below-average expense ratios, and with good reason. Since funds take out expenses from the income their portfolios generate, high expenses can help to wipe out a portfolio's dividend income. The 1.5% annual expense ratio of a typical U.S. stock fund is enough to drastically reduce or eliminate dividend payouts. Value funds, which typically have the highest dividend yields among stock funds, could get an early boost if the proposal passes.
One question that remains is how interest from bond and money market funds would be treated, since mutual funds receive interest payments and pay them out as dividends. According to a report by Standard & Poor's Chief Economist David Wyss, bond funds would probably need to classify dividends as "qualified" and "nonqualified," and provide a more complicated