Russell Investments research indicates that small-cap stocks tend to do well after a recession, indicating their possible outperformance once the market has hit its bottom. This theory has been reinforced since the market lows reached on March 9. Since then, Ian Wyatt for SmallCapInvestor says, the majority of stocks gaining on any particular day have been of the small-cap variety.

Why? Chalk it up to nimbleness. Small-caps can shift and change strategies as market conditions change much more easily than larger companies can.

Meanwhile, the iShares Russell 2000 (IWM) is up 45.9% off the March 9 market low. Traders are watching these indicators, although the jury is still out on whether a turnaround within the market has actually or will occur. Just remember, be ready with an entry and an exit strategy and watch the trend lines, because time will only tell.

Don’t forget about international small-caps, either. Many European small-caps are faring well in a down economy.

• SPDR S&P International Small Cap (GWX): up 14.1% year-to-date

• iShares S&P Small Cap 600 Index Fund (IJR): down 0.1% year-to-date

• Vanguard Small Cap (VB): up 8.1% year-to-date

• WisdomTree Small Cap Dividend Fund (DES): down 7.6% year-to-date

Since financial companies usually dominate dividend-paying companies, it is only natural they faltered during the recent housing/credit crisis.

Gary Gordon for ETFExpert says financial stock prices lost 40% of their value (Lehman Bros. (LEH) lost that in one day!) and dividend funds shed 20% of their value.

Some funds managed to withstand the beating, though:

• Vanguard Dividend Appreciation (VIG): down 7% year-to-date vs. the S&P 500, which is down 14.7%. The Dividend Achievers Index is tracked and these companies tend to increase dividends over time. Low allocation to financials (11%) and telecom (4%) has kept this ETF afloat. Yields 2% annually.
• WisomTree Small Cap Dividend Fund (DES): down 3.6% year-to-date; Small-caps have outperformed their larger competitors, and this has helped DES. You are getting paid to own great companies for the long haul, but beware of the small bank exposure.
• Eaton Vance Risk-Managed Diversified Equity Income Fund (ETJ): Up 0.6% year-to-date. Diversification, income stream and risk management are three pluses right in the title. This is actually a closed-end fund (CEF), but the 10% payout on a quarterly basis make this ETF worth owning an income-focused fund.

Foreign stocks have had much more attractive yields these days, as proven by a foreign large-cap stock measure in developed markets which showed yields at 3.7% payout as of July 31, compared with 2.4% for U.S. stocks, reports Shefali Anand for The Wall Street Journal.

Dividend-paying ETFs and stocks are safer ideas in turbulent markets like the one we are experiencing, giving retiring baby-boomers an edge when looking for ways to get an income stream. Unfortunately, for now, many of the highest-paying dividend stocks in the United Sates are within the financial sector.

The same is true for those overseas, however, many of these financial institutions haven’t been as hard-hit as those domestically.

Dividend-yielding foreign stocks bring other risks to the table, as well. The main troubles are currency risk, foreign banks will slow if credit meltdown goes deeper, and share buybacks are more common now than in past years.

There was a time when U.S. companies had higher payouts, but over time, they’ve been taking those earnings and putting them back into the business. Foreign companies tend to take a more traditional approach: money earned belongs to the shareholders.

Dividends are still an objective way to add value to a company, and some of the ETFs accessing this are:

• PowerShares International Dividend Achievers Portfolio (PID): yields 4.1%, down 16.9% year-to-date
• WisdomTree International Small Cap Dividend (DES): yields 2.6%, down 7.2% year-to-date
• iShares Dow Jones EPAC Select Dividend (IDV): 8.3% yield (Caution: 50% of assets are in financials), down 24% year-to-date