Investors looking for dividend-paying stocks will encounter the argument that “growth” stocks may be better than those paying dividends, remarks John Jagerson for Learning Markets. (Read about how dividends can help).

Dividend-paying stocks, however, have usually outperformed major growth indexes as a result of lower volatility returns. For example, the Dow Jones Select Dividend Index has outperformed the S&P 500 and the Russell 2000 by almost 100% in the last 10 years.

Jagerson commented that an investor does not need to decide on a dividend-paying portfolio over a growth-oriented portfolio. A reasonable alternative may be a combination of the two.

You could take the time to scrounge up individual stocks that pay dividends, but you may also consider ETFs as an easy way to gain exposure to dividend-paying stocks. (Read about strategies to rebuild your portfolio).

For more information on dividends, visit our dividend category.

• SPDR S&P Dividend ETF (NYSEArca: SDY): up 16.4% year-to-date; yields 4.27%

• WisdomTree LargeCap Dividend (NYSEArca: DLN): up 15.8% year-to-date; yields 2.94%

• iShares Dow Jones Select Dividend Index (NYSEArca: DVY): up 7.1% year-to-date; yields 4.32%

Max Chen contributed to this article.

Proponents of fundamental indexing contend that mutual funds and ETFs based on the S&P 500 are flawed in their designs, reports John Spence for The Wall Street Journal. The S&P 500 can be top-heavy with companies that have large market value, adding weight to the stocks.

• SPDR S&P 500 ETF (SPY): up 3.6% year-to-date

The new breed of funds that seek to remedy this issue are based on indexes that weight stocks by high dividend yields, low share-price-to-earnings ratios and various other factors. It is thought that these types of funds are less risky and provide better long-term performance.

• PowerShares FTSE RAFI US 1000 Portfolio (PRF): up 10.6% year-to-date

According to Rob Arnott, founder of Research Affiliates LLC and the father of fundamental indexing, the market does tend to incorrectly value stocks, and the solution should be to weight stocks by book value, cash flow, sales and dividends. Research Affiliates also readjusts its index annually by shifting its ETF into sectors with strong fundamentals but lower stock prices. The effect is to allow investors the benefit of capitalizing when the markets shift.

There are skeptics of this new methodology. Fundamental indexing could tend to lean toward “value” investing. But proponents claim fundamental-indexing strategies perform better environments like after market bubbles burst, not speculative markets.

Where do you stand? Talk about it in the forums!

For more information on indexing, visit our indexing category.

Max Chen contributed to this article.

Some of the dividend-focused ETFs are so diversified that they could stand in as core holdings for a portfolio, remarks Paul Justice for Morningstar. When considering a dividend paying stock or ETF, the objective is to think growth over the long-term. Dividend investing is all about finding solid dividend stocks that are reasonably priced and are expected to continue raising their dividends in the future, explains Dividends4Life on iStock Analyst.

Do not confuse dividend investing with searching for high-yielding stocks to generate a high income. A majority of the time, the quality ones will not have outrageous yields, however the growing dividends over time could compensate.

Here is a small sample of dividend-paying ETFs. Note that this is not all-inclusive, and there are may other worthy ETFs delivering dividends to choose from:

• Vanguard Financials (VFH): yields 5.9%; down 5.2% year-to-date
• PowerShares International Dividend Achievers (PID): yields 6.2%; up 3.4% year-to-date
• SPDR S&P Dividend ETF (SDY): yields 6.4%; down 1.1% year-to-date
• SPDRS (SPY): yields 3.3%; up 1.4% year-to-date
• WisdomTree LargeCap Dividend (DLN): yields 4.8%; down 4.5% year-to-date
• Industrial Select Sector SPDR (XLI): yields 4%; down 2.3% year-to-date
• Diamonds Trust, Series 1 (DIA): yields 3.9%; up 2.8% year-to-date
• iShares S&P 100 (OEF): yields 3.7%; down 0.9% year-to-date
• iShares NYSE 100 (NY): yields 3.8%; down 2.9% year-to-date
• Rydex Russell Top 50 (XLG): yields 3.6%; down 1.6% year-to-date

The tech industry is now ripe with large-cap companies that are well-established from the dot-com boom. Many are in a position to share their income streams with their shareholders, as Oracle (ORCL) led the good news amid their declaration of their first-ever quarterly dividend at 0.5 cents per share, reports Dividend Growth Investor.

Other heavyweight tech companies, such as Microsoft (MSFT) and Cisco (CSCO), are not displaying the rapid growth as they once were. As a result, they start distributing larger portions of their net incomes to shareholders in the form of dividends. But will they continue to do so after the dividend tax is repealed?

• Technology Select Sector SPDR (XLK): up 4.9% year-to-date; Cisco is 6.1%; Microsoft is 9.1%; Oracle is 4.6%

• WisdomTree LargeCap Dividend (DLN): down 13.1% year-to-date; yields 5.2%; Microsoft is 2%

2008 was the worst year ever for corporate dividend payouts among companies in the S&P 500.  In the final three months of 2008, $15.9 billion worth of S&P 500 dividend payouts were washed away.  To add fuel to the fire, 2009 hasn’t been much better.  General Electric (GE) slashed its dividend by more than two-thirds and Wells Fargo (WFC) cut its dividend by 85%, states Jonathon Burton of The Wall Street Journal.

This is a double blow for many investors who depend on dividend income, and were banking on dividend payouts to cushion the losses suffered from the bear market.

On the positive side, there are still some companies out there that are actually increasing dividends.  Most of these companies are in the essential services sector and are in a business that generates positive cash flows.

If you want to grab some exposure to the dividend world, take a look at the following:

• WisdomTree Large Cap Dividend Fund (DLN): down 40% in the last six months; GE is 4.7%; Wells Fargo is 1.8%; yields 5.23%

• PowerShares Dynamic Consumer Staples Fund (PSL): down 32.1% in the last six months; yields 1.85%

One thing to note is that all of these companies are in the “essential services” sector, such as consumer staples, energy, health care and utilities, states Greg Donaldson of Seeking Alpha.  Some of these companies include Coca Cola (KO), which raised its dividend 8%; Colgate (CL), which raised its dividend 10%; Kinder Morgan Energy Partners (KMP), which saw an 11% hike; Abbott Labs (ABT), which raised its dividend by a whopping 11%; and FPL Group (FPL), which shot off a 6% increase in its dividend.

In general, these companies are raising their dividends for the following reasons:

• Their earnings are growing and they are confident that prosperity is in their future, despite the economic downturn
• They have a history and track record of sharing their financial success with their shareholders by increasing their dividends
• They are in solid businesses that produce positive cash flows from which dividends can be paid

If these companies continue to be financially successful and are willing to share this success with their shareholders, the ETFs that contain them will become more attractive and could generate a higher ROI, with dividend payments included, than a run-of-the-mill index; but remember to watch the trendlines if considering to get into an ETF that holds these companies.

If you do want to grab exposure check these out:

• WisdomTree LargeCap Dividend Fund (DLN): down 27.1% year to date; KO is 1.66%; ABT is 1.2%

• PowerShares Dynamic Consumer Staples Fund (PSL): down 15.5% year-to-date; CL is 2.6%; KO is 2.4%

• Utilities HOLDRs (UTH): down 18% year to date; FPL is 8.9%

Dan Caplinger for The Motley Fool reports that after the tech bubble in the 1990s, dividend investing came back into style and Wall Street responded with the advent of dividend-paying ETFs. Many investors have had a rough time lately, and current market conditions have yielded bigger losses on dividend stocks than what they’ve gotten back in quarterly checks.

Here are five major dividend ETFs, all assembled in different ways:

• WisdomTree LargeCap Dividend Index Fund (DLN): Takes the 300 largest dividend-paying stocks and weights them according to the total amount of dividends each company pays.
• iShares Dow Jones Select Dividend Index Fund (DVY): Includes dividend-paying stocks that have maintained or increased dividends in the last 5 years.
• PowerShares Dividend Achievers (PFM): Screens for companies that have increased dividend payouts for the past 10 years and takes the highest paying stocks among them.
• SPDR S&P Dividend ETF (SDY): Takes 50 high-yielding companies that have raised dividends over the last 25 years.
• First Trust Value Line Dividend Index Fund (FVD): Uses value-line safety rankings to screen for stocks that are safer-than-average, and then takes high dividend yields of companies with market caps over $1 billion; takes an equal-weight approach.

After years of strong performance from financial stocks, many investors who got into the game late got burned. Many financial companies paid out beautiful dividends, but this is not the case right now. As of 2007, the bottom fell out of the sector and the ETFs suffered more than the broad market.

To approach dividend investing by what stock shave the highest yields is not the best way to go about your strategy. Instead, think about diversification and this will help avert the chance of big losses in little time.

For more dividend yields, you can visit WisdomTree’s Dividend Yield Analysis page.