According to Morningstar, there are 56 mutual funds with the word "dividend" in their name, plus another 33 dividend ETFs. The numbers may be imprecise, since funds come and go, but there certainly are dozens of vehicles available to investors who want to put money into dividend- paying stocks.

It's easy to understand why these investments are popular. "Dividend-paying companies generate excess cash," says Christopher Davis, a senior mutual fund analyst at Morningstar. Companies with a solid history of paying dividends are likely to be sound enterprises and thus merit investment consideration. Moreover, dividend-paying stocks may have attractive payouts in these low-yield times. In 2010, at least, dividend income is favorably taxed, compared with bank accounts and taxable bonds. Buying a fund or EFT holding dividend-paying stocks, then, is a way to get diversification along with strong companies and favorable payouts.

But the biggest reason dividend funds are in the spotlight right now is that dividend-paying stocks may offer some downside protection during a market meltdown. Tom Lydon, president of Global Trends Investments in Irvine, Calif., and founder of ETFtrends.com, cites one study of the 2000-2002 bear market, which found that dividend-paying stocks outperformed non-dividend- payers by 47%, on average. Lydon also points to research covering the years from 1970 to 2000, which concluded that dividend-paying stocks outperformed non-dividend payers during down markets by an average of 1.5% per month.

The appeal of a dividend payout might put the brakes on sales pressure in bear markets. Moreover, bear markets often go hand-in-hand with economic recessions, and many dividend payers are in industries, such as utilities and consumer staples, which are thought to be relatively recession-resistant. On the other hand, financial companies are often known for paying hefty dividends, and they led the market downward during its most recent fall. To see whether dividend-paying stocks qualify as a down-market hedge, let's look at how dividend-paying mutual funds and ETFs performed during the market collapse of 2008 and other market downturns within the past 10 years.

EXAMINING THE EVIDENCE

Have dividend funds been able to resist recessions? Generally, dividend funds have short track records, with a wide variety of returns. Nevertheless, available statistics indicate that some of them have delivered relative stability during difficult times.

Using data supplied by Morningstar, the follow results emerge:

* Of the 56 dividend-oriented mutual funds, 38 fall into the large-value and large-blend categories, both of which had average losses over 37% in 2008.

* Of those 38 funds, 35 were operating throughout 2008. Only five of them posted losses larger than their category averages.

* Many dividend funds beat the category average by small amounts.

A 35% loss, for example, might have been better than average but was still nothing to boast about.

* Eleven of the large-value and large-blend dividend funds posted losses of less than 30% in 2008, which turned out to be exceptional performance that year. Among the smallest losers were Nuveen Santa Barbara Dividend Growth (down 24.6%), Vanguard Dividend Growth (down 25.6%) and Dividend Growth Trust Rising Dividend Growth (down 26.1%).

While most dividend mutual funds hold domestic large-cap stocks, the opposite is true for ETFs. Dividend ETFs all track an index, and apparently there are only so many ways dividend-paying large-caps can be indexed, so only 10 of the 33 dividend ETFs on the Morningstar list are domestic large-caps. Other dividend ETFs track indexes ranging from Japan (WisdomTree SmallCap Japan Dividend performed best in 2008, losing only 17.3%) to Europe (First Trust Dow Jones STOXX Euro Select Dividend lost 61.2% that year). Thus, planners who wish to hold all manner of dividend-paying stocks can find plenty of ETFs to fill client portfolios.

Among the ETFs tracking domestic large-cap value or blend indexes, all 10 posted losses that were smaller than the broader market's 37% in 2008. Four of them held losses to less than 30%, led by SPDR S&P Dividend (down 22.9%), First Trust Value Line Dividend Index (down 24.2%) and Vanguard Dividend Appreciation (down 26.5%).

Lower-than-average losses in 2008 might be considered especially impressive, considering that dividend funds often load up on financials, the sector that led the dive that year. Lydon reports that companies in the S&P 500 stopped paying $65.4 billion in dividends from September 2008 until March 2009. Of those billions, 68% resulted from dividend cuts at financial firms.

If 2008 was an unusual year, both in the severity of the decline and in the role played by the dividend-heavy financial sector, it might be useful to look at the last "normal" bear market year. In 2002, the average domestic stock fund fell by nearly 21%, and the financial sector outperformed, with specialized financial mutual funds losing about 10%.

Morningstar lists 21 dividend-focused mutual funds in the large-value and large-blend categories that show returns in 2002; 13 of them topped their category averages. Franklin Rising Dividends (-1.8%) and Allianz NFJ Dividend Value (-7.1%) were among the leaders in that down year. From this admittedly limited sample, it seems that dividend-focused funds have provided some downside protection in what has generally been a bleak decade for large-cap stocks.