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Question: My accountant told me I should have more dividend-paying stocks in my account and less parked in money funds. Can you explain why?

Tom G.

Answer:

Dear Tom,

Without knowing the particulars about your financial life, I am responding with a general statement. You really need to go back and ask your accountant. However, armed with the following information, you will be able to have a useful conversation on the topic.

Income derived from money market accounts, money market mutual funds, bank certificates of deposit and stock dividends is taxed. However, not all of these income-producing vehicles are taxed at the same rate.

Dividend income is taxed at no more than 15% while interest income is taxed at one's ordinary tax rate and that can be as high as 35%.

This tax break for dividends may be why your accountant has suggested moving some of your interest-paying assets into a portfolio of dividend-paying stocks.

If this is indeed the thinking behind the recommendation, you should set up a diversified portfolio and select only high-quality paying stocks. Do not put all of your money in just one stock. You will be in serious trouble if that stock falls in price or cuts its dividend. Diversification is an excellent way to spread out risk.

I also advise that you keep one to three month's worth of living expenses in a money market account. Should you face a financial emergency you want to have access to immediate cash.

You can choose to have money in your BUYandHOLD account that is not invested automatically swept into a money market fund by e-mailing service@buyandhold.com stating your account number and the money market account you wish to add. Click here to learn more about the money market funds offered at BUYandHOLD.

$Tip: For a list of stocks with high dividends, take a look at Value Line Investment Survey's "Weekly Index." This research publication provides a quick way to compile a list of potential stocks. It also gives a rating for safety and a rating for timeliness for each stock it covers.

Check your public library for a copy or if you wish a three-month trial subscription, go to: www.ValueLine.com.

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