Many income-focused investors are using dividend exchange traded funds to anchor the equity component of their portfolio. Dividend ETFs are more volatile than bonds, but some investors like the combination of yield and chance for capital appreciation.

As we witnessed in 2011, dividend-paying ETFs have held their own during rough market conditions. During tumultuous times, investors have sought out dividend stocks to offset losses in other areas. For instance, while dividend payers were hit along with the rest of the markets during 2008 and 2002, dividend stocks gave up less ground than their non-paying counterparts. [Can Dividend ETFs Sustain Their Performance?]

Still, companies that are able to generate dividends and continue to increase dividends will also be able weather poor markets. When the markets are good, they will enjoy capital appreciation as earnings growth supports their dividends.

Dividend growth is still gradually rising. As companies expand, the firms reward their investors through higher dividend payouts. [Dividend ETF Can Anchor a Portfolio]

It comes down to the fact that dividend ETFs generate income. People enjoy watching their wealth grow, and dividends have helped investors realize their goal for over the past century. [Dividend ETFs and Taxes]

“According to the excellent Credit Suisse Global Investment Returns Sourcebook 2011, from 1900 to 2010 the U.S. stock market experienced 6.17% annualized real growth,” according to Morningstar analyst Samuel Lee. “About 4.24 percentage points of the market’s return came from dividends, 1.37 percentage points from real per-share dividend growth, and a paltry 0.56 percentage points from price/dividend expansion (also known as the speculative return).”

Dividend ETFs include:

  • iShares Dow Jones Select Dividend Index Fund ETF (NYSEArca: DVY)
  • SPDR S&P Dividend ETF (NYSEArca: SDY)
  • Vanguard Dividend Appreciation ETF (NYSEArca: VIG)
  • Vanguard High Dividend Yield ETF (NYSEArca: VYM)
  • WisdomTree Dividend Top 100 Fund ETF (NYSEArca: DTN)

For more information on ETFs, visit our ETF 101 category.

Max Chen contributed to this article.