Royce's, WisdomTree's Secret Fund Formula

Like the Allianz fund, Royce Total Return stays broadly diversified. The fund holds 400 dividend stocks, rarely putting more than 1% of assets in any one name. Portfolio manager Charles Royce favors companies with strong balance sheets and the ability to survive economic downturns. A favorite position is Lincoln Electric Holdings(LECO Quote), a maker of welding equipment that yields 2.5%.

Index-fund investors may prefer WisdomTree SmallCap Dividend, an exchange-traded fund that outdid the Russell 2000 by more than 5 percentage points in 2008. WisdomTree tracks a fundamental index of dividend stocks. According to this system, the ETF puts more of its assets into stocks that distribute greater total dividends. This is different from benchmarks, such as the S&P 500, which are weighted according to market capitalization. In an S&P index fund, stocks with bigger market capitalizations account for a greater percentage of assets.

Siracusano of WisdomTree says the company's dividend-oriented approach can be effective in foreign as well as domestic markets. Last year, WisdomTree International SmallCap Dividend(DLS Quote) outdid the MSCI EAFE Small Cap Index by 2 percentage points. WisdomTree Emerging Markets SmallCap Dividend(DGS Quote) topped the MSCI Emerging Markets SmallCap Index by more than 11 percentage points.

In a year when nearly all equity funds were clobbered, shareholders may have seen little reason to cheer WisdomTree's victory margin. But by sticking with dividend funds that excel in downturns, patient investors may achieve stellar long-term returns.