Life appears to be good for holders of dividend-paying stocks. Particularly for those investing in mutual funds that focus on dividend-paying stocks.

The Vanguard Dividend Growth Fund is up 13.4 percent year to date; the Safeco Dividend Income Fund is up 10.1 since the beginning of the year.

It seems logical that dividend-paying stocks, and the funds that hold them, should be doing well. After all, President Bush just signed a tax cut that lowers the income tax on dividends to a maximum 15 percent, from the ordinary rates as high as 38.6 percent.

But wait: the overall market, as measured by the Standard & Poor's 500 Index is up even more, 14.1 percent year to date.

And the Nasdaq Composite Index, composed heavily of non-dividend-paying technology stocks, has gained a whopping 23.4 percent since the end of 2002.

It can't be just the dividends.

Traders stay ahead

The point: Stocks are moved by way more than what Washington, D.C., does. And investing based on Congressional whims isn't likely to get you any further ahead.

That's because the professional traders typically anticipate any governmental changes long before we regular people do.

"The market always anticipates," says Valerie Newell, managing director at RiverPoint Capital Management. "The market always factors in after-tax benefits."

Besides, stocks are more affected by profits and economics.

Indeed, companies reported higher profits in the first quarter, with S&P 500 operating earnings gaining about 15 percent over the first quarter of 2002.

And many companies are predicting a strengthening economy will provide even better earnings later this year. Estimates call for year-over-year operating earning gains of 18.8 percent in the third quarter and 21.4 percent in the fourth quarter. Hence, stock prices are up across the Big Board.

'Another layer'

But here's another reason not to let Congress drive your investments: this recent dividend tax cut isn't all that clear-cut.

Take real estate investment trusts. Since the law requires REITs to distribute more than 90 percent of their profits to shareholders, these companies tend to have very good dividend payouts.

Duke Realty Corp., Cincinnati's largest commercial property owner, has a dividend yield of 6.8 percent, for example.

And its stock price, up 6.0 percent so far this year, is largely unaffected by the dividend tax cut. Its dividends are still fully taxable at ordinary rates since they are not taxed at the corporate level.

No double taxation, no tax cut.

"Investors will see 1099s that will separate out dividends that will be fully taxable, and those that qualify for the 15 percent (rate)," said Steve Eklund, director of portfolio management at Johnson Investment Counsel in Monfort Heights.

"It will just be another layer."

Contact Amy Higgins at 768-8373; ahiggins@enquirer.com; or 312 Elm St., Cincinnati 45202. She regrets that she cannot reply to all individual questions.