In a bleak year for the markets and many exchange traded funds (ETFs), there were some bright spots, believe it or not.

WisdomTree’s line of dividend ETFs was one of them. The ETF provider known for using a dividend strategy in many of their ETFs provided impressive yields at the end of the year, ranging anywhere from 4% to 8%.

“The dividend fund yield at the end of 2008 was significantly higher than the yield you could get in U.S. government bonds,” notes Luciano Siracusano, WisdomTree’s chief investment strategist.

For example, their largest international dividend fund, WisdomTree DEFA (DWM), paid out a total of $1.76 per share in December. That distribution was 4.69% of the fund’s net asset value (NAV). “That’s at a time when the U.S. market is yielding 2%,” Siracusano says.

The dividends are connected to WisdomTree’s proprietary methodology, by which they include only dividend-paying stocks in their indexes, then weight them according to the dividend the company paid in the previous year. Only dividend-paying companies are eligible for inclusion in the indexes. The end result is that stocks that pay more divideds have a greater weight.

“Dividends are important for people who want to generate income in a downturn, but it’s also important for long-term investing,” Siracusano notes. “There’s a connection between higher dividends and higher returns over time.”

According to their investment philosophy, from 1926 through 2004, reinvestment dividends accountsed for 96% of the stock market’s total return after inflation.

The bleak economic news that came out in 2008 saw a number of companies scaling back their dividends, if not eliminating them altogether. However, in the big picture, relatively few companies actually cut dividends and just three companies were responsible for the majority of that: Citigroup (C), Bank of America (BAC) and Wachovia (WB).

WisdomTree’s Director of Research Jeremy Schwartz points out that at the time of their annual index reconstruction on Nov. 30, there were 1,200 dividend payers paying out $267 billion. While that’s down from the $288 billion paid out at the same time in 2007, the three financials above were responsible for $20 billion of the $21 billion difference.

Their domestic funds pay quarterly, and the international funds will also begin paying quarterly this year. Until now, they were paying annually.

WisdomTree went with the dividend strategy because, Siracusano says, “We realized the world didn’t need another market-cap weighted index fund. We use this strategy because there’s a lot of research that told us it was better.”

Three funds to take notice of are:

• WisdomTree Total Dividend (DTD): This fund gives exposure to all dividend-paying stocks in the United States. It had a yield of 4.4% at the end of 2008, and distributed 0.39 cents a share in the December quarter.

• WisdomTree DEFA (DWM): Tracks the WisdomTree Dividend Index of Europe, Far East Asia and Australasio (DEFA). As noted above, it distributed $1.76 a share in December for a 4.6% yield.

• WisdomTree Emerging Markets High-Yielding Equity (DEM): Had a yield of 6% at the end of December. Siracusano says that while cap-weighted indexes were down as much as 58%, DEM was down 37% for 2008.

Tags: Bond ETFs, DEM, Dividend ETFs, DTD, DWM, Emerging Markets