Investors tired of sagging stock prices have learned anew the real benefits of dividend-paying stocks. Cash dividends you can take to the bank. It is also reassuring to know that dividend-paying companies actually have profits and enough cash flow to pay dividends. The old premise that stock values will rise without the company’s demonstrating an ability to make a profit just doesn’t cut it anymore.

Corporate earnings have always been one of the most important factors affecting stock prices. After all, when you buy a stock, you are buying shares of a company’s future profit stream. Companies that can grow earnings quickly and consistently will command a higher stock price.

Some believe that dividends may also cushion falling stock prices. Stocks of quality companies that consistently pay dividends may hold up better in a bear market because the dividend may still attract buyers. Record-low yields for money market funds and other safe investments are currently adding to the lure of dividend-paying stocks.

There is a downside to dividends in comparison to long-term appreciation in a stock’s value. Dividends are taxed at ordinary income tax rates that could be as high as 38.6 percent. Compare this to long-term capital gain taxes that are generally no higher than 20 percent.

As part of his economic recovery plan, President Bush has proposed the elimination of taxes on dividends. There’s no assurance at this point that this proposal will pass in Congress and actually become law. Remember, too, that under current law, dividends from investments in your retirement plans aren’t taxed until the funds are withdrawn. As you make investment decisions this year, be sure to stay informed about any new or pending legislation that could have an impact on the choices you make.

Bertrand Labonte is an accountant with Ouellette, Labonte, Roberge & Allen Professional Association.