Dividend exchange traded funds have experienced exponential growth this year, and the case for investing in them has just gotten stronger. The paltry yield environment is expected to hang around for some time with the Federal Reserve committed to keeping rates low, so the news that U.S. stocks are expected to boost dividend cash payments is well received.

“And dividends are going to have to be a much more important component of investors’ total returns going forward. Historically, when you look back over the last 100 years, dividend yield alone averaged about 4.4%. It’s close to half of the nominal return on equities and more than half of the real return,” Josh Peters said on Morningstar.

As the prospect of capital gains is less certain, investors are turning to dividends for an income stream they can count on.The market doesn’t go up 20% a year or 25% a year anymore like it did in the late 1990s, and there are no indications that this will ever repeat itself, reports Peters. [Why Preferred Stock ETFs are Hot

The good news is that the pay out on dividend stocks is expected to rise. Over the second quarter, investors received a 14% boost in cash payments this year. Matt Krantz for USA Today reports that over the second quarter about 505 U.S. companies raised their dividend pay outs; 677 companies did so in the first quarter of 2012. [ETF Chart of the Day: Dividends]

Dividends are competitive with other investment options. The yield on the S&P 500 is currently around 2%, while the yield on a 10-year Treasury is around 1.5%. Furthermore, S&P Dow Jones Indices says that dividends are expected to rise 16% later this year, meaning 70% of stocks in the S&P 500 will boost dividends this year.

One point of caution with dividend investing – beginning next year, Bush tax cuts are set to expire. They have been in place since 2003, with most investors paying a 15% tax rate on dividend income. Unless Congress takes action, the tax rate could spike up to 43.4%, possibly sparking a year-end sell-off.  [U.S. Utilities: Don’t Overpay for Yield]

Various dividend ETFs:

  •  iShares High Dividend Equity Fund (NYSEArca: HDV)
  • iShares Dow Jones Select Dividend (NYSEArca: DVY)
  • Vanguard Dividend Appreciation (NYSEArca: VIG)
Tisha Guerrero contributed to this article.  

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.