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It's a great feeling to receive a lot of dividends throughout the year, then on the following April 15, realizing that you don't have to pay tax on any of that income. There are many stocks, which are primarily closed end funds or CEFs, which pay dividends that are tax free. This tax free income is generated from municipal bonds in the portfolio. Although many of the Canadian oil income trusts pay income that may be partially or completely tax deferred due to depletion and depreciation deductions, the tax free stocks that invest in munis usually generate dividends that are completely exempt from Federal taxes.

Municipal bonds are issued by states, counties, cities, and other governmental agencies. Income from these bonds is exempt from Federal income taxes, and if the bonds are issued in your state of residence, the income is exempt from state income taxes also. Municipal bonds issued by Puerto Rico and other U.S. dependencies are exempt from state income taxes also for residents of most states. There are over 200 different tax free income stocks according to WallStreetNewsNetwork.com, with 42 of them yielding 7% or more. Just be cautious about investing in extremely high yield muni CEFs which may use leverage to attain their high yields.

One of the highest yielding tax free stocks is Federated Premier Municipal Income Fund (NYSE:FMN) which yields 7.8%. They have been paying monthly dividends since 2003.

For you New Yorkers, there is the BlackRock New York Municipal Income Trust (NYSE:BNY) which pays 6.7%. It invests in New York education, hospitals, housing, pollution control, tobacco, transportation, and water and sewer bonds. It has paid quarterly dividends since 2001.

If you live in California, you might want to consider the Van Kampen California Value Municipal Income Trust (NYSE:VCV) which yields 7.6%. They mostly invest in California investment grade municipals. The fund was founded in 1992 and pays dividends monthly.

Van Kampen also has a high yielder for Massachusetts residents, the Van Kampen Massachusetts Value Municipal Income Trust (NYSEMKT:VMV), which pays 6.8%. The fund invests in Massachusetts municipals including bonds for education, general purpose, and water and sewer. They have paid monthly dividends since 1995.

There is also their Van Kampen Pennsylvania Value Municipal Income Trust (NYSE:VPV), which yields 7.0%. This holder of Pennsylvania municipal securities has been paying monthly dividends since 1995.

You can download a free Excel database spreadsheet list of over 200 tax free stocks at WSNN.com. Keep in mind that both yields and share prices fluctuate, and there is the possibility of bonds in the portfolios defaulting, as junk munis do exist, such as some 'dirt bonds' used to fund infrastructures of new housing developments (some of which never get built).

Disclosure: Author does not own any of the above.

Source: Closed-End Funds and Tax Free Dividends