• Cash dividends can yield extra income with a low rate of taxation.snatch image by Valentin Mosichev from Fotolia.com
  
  Investors seeking a stable source of passive income often choose to invest in stocks that pay cash dividends. According to the online finance dictionary, a cash dividend is a share in the profits of a company that is distributed to each shareholder in cash in proportion to the percentage ownership each shareholder has. There are several advantages to owning stocks that pay dividends, including regular income, stable investments and potential tax benefits.
  
  

Regular Income

• Since the cash dividends on most stocks pay out on a quarterly basis, investors who own many such stocks can generate quite a bit of passive income. Payments can be made even more regular by diversifying the investments among companies whose quarters start in January, February, and March. That way, the investor will receive dividend payments every month of the year, because every month will represent the end of at least one company's quarter. It is worth noting, though, that investors should not expect their principal investments in dividend stocks to grow very much, since companies that pay dividends are unable to reinvest their profits into growth.
  
  

Stable Companies

• Investments in companies that pay dividends, especially ones that pay dividends on the larger side of the spectrum, are typically safe investments. This is because only well-established companies with relatively predictable quarterly profits can afford to pay dividends. The fact that a company pays dividends also shows that it is not looking to expand much beyond its present capacity and therefore is unlikely to take risks that could result in a catastrophic stock price crash. Investors in dividend stocks can usually rest assured that their principal investments will be safe, subject only to the fluctuations of the larger market.
  
  

Tax Benefits

• Depending on local tax laws, there can be tax benefits to taking dividend payments rather than cashing out on a stock whose price has dramatically increased in a short period of time. Typically, investment profits are taxed as short-term gains if they have been held for less than one year, and as long-term gains if they have been held for more than one year. Short-term capital gains are taxed at a rate equivalent to the normal income tax, whereas the tax on long-term capital gains is much less--usually around 15 percent. Qualified dividends are taxed between 5 and 15 percent, depending on the individual's normal income tax rate, so taking profits from investments in the this form can represent a substantial tax savings.