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Why Value Funds Could Lead the Markets

A high-dividend holding is AT&T (T), which yields 5.4%. Levine says the company's wireless business is growing, but the landline operation is shrinking. As a result, he doesn't expect the company to report much earnings growth. Still, the dividend alone should deliver decent results. "This is a steady stock that should help to reduce the volatility of the fund," Levine says.

How to Turn Apple's Stock Into an Income Stream >>

A growing holding is CVS Caremark (CVS), which operates a retail drug chain and a pharmacy benefit manager. The stock only yields 1.4%, but the company should grow as drug sales continue climbing relentlessly.

Nuveen Dividend Value returned 2.7% annually during the past five years, outdoing 96% of peers. The fund looks for rock-solid companies that seem likely to increase their dividends. The portfolio managers aim to find shares that have fallen out of favor.

The managers recently bought Carnival (CCL) after one of the company's cruise ships sank off Italy. The shares plummeted as investors reacted to the negative headlines. "Carnival has very good cash flows, and the cash flows are improving," says David Chalupnik, Nuveen's head of equities.

Another holding is Pfizer (PFE). Because it is showing little growth, the pharmaceutical giant may look boring. But Chalupnik says the company generates huge amounts of cash. The management is unlocking value by selling off parts of the company at rich prices.

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A low-risk fund is Federated Equity-Income, which has returned 1.0% annually during the past five years, outdoing 83% of peers. The fund excelled during 2008, outdoing 93% of peers. Portfolio manager John Nichol limited losses by avoiding financials with uncertain prospects. Nichol emphasizes blue chips with growing dividends. Holding include International Business Machines (IBM) and Chevron (CVX).

Stan Luxenberg is a freelance writer specializing in mutual funds and investing. He was executive editor of Individual Investor magazine.
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