Cash Flow

• If you need to derive current income from your investment portfolio, investing in dividend-paying stocks and mutual funds can be a smart move. Dividend-paying stocks can provide a steady and reliable stream of income that you can use to supplement your retirement or provide extra cash flow to meet your current needs. Many retirees use dividend-paying stocks to supplement their pension and Social Security income.
  
  

Tax Considerations

• The income you receive from dividend payments is taxable. You will have to add that income to your wages and interest when you complete your tax return. You should receive a 1099-DIV form from each brokerage firm or mutual fund where you hold dividend-paying stocks and funds, and you must report the amounts from these forms on Schedule B of your tax return.
  
  

Tax-Deferred Accounts

• You can use tax-deferred vehicles like IRA accounts to hold your dividend-paying stocks and mutual funds. Investing in dividend-paying stocks through a tax-deferred account allows you to avoid the taxes that would otherwise apply. If you do not need the current income, it makes a lot of sense to shelter your dividend-paying stocks by using a tax-deferred account like a 401k or IRA. But if you need the current cash flow, it is better to use a personal account instead.
  
  

Stocks vs. Funds

• When you invest for dividend income, you can choose dividend-paying stocks or you can diversify your holdings by using mutual funds. Dividend-paying stocks can often provide a better rate of return, but they can be riskier as well. When you invest in a dividend-paying stock, you tie your fortunes to a single company and there's no guarantee that the company will continue to pay dividends or at the same rate. With a mutual fund you own many different stocks, each with its own dividend payment.