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One of the casualties of the credit crisis has been the lucrative dividend payments that dozens of companies have either cut or suspended. While those firms desperately needed that cash, it meant billions of dollars didn't wind up in the wallets of shareholders.

We have always championed the benefits of owning stocks that pay a dividend. In tough economic times these payments can provide valuable income to retirees and help younger investors get a few extra percentage points of return that can mean the difference between lagging and beating the broad market. Studies have shown that dividend-paying stocks are the better investment over time than those that don't make these payments.

If you agree with us on dividends, then you've probably already discovered equity-income funds. This fund category picks stocks (and the occasional bond) just like their competitors, except that they put more emphasis on finding ones that will help lift the portfolio's yield higher than that of a given benchmark. This week the SmartMoney.com fund screen puts the spotlight on these offerings. According to our Lipper database, there are 310 funds and share classes in the equity-income category. We got that universe down to 48 by knocking out funds that charge a sales load. Once we added in performance and fee criteria we were left with nine funds. They are listed on the table below.

Equity-income funds have become popular the last few years thanks to a change in tax policy. President Bush's 2003 tax bill slashed the top tax rate on dividends to 15% from as much as 38.6%. That caused many companies to rethink paying dividends and investors to take a second look at their impact on portfolio returns. It also led to a series of mutual fund launches that focused on dividend-paying stocks.

Typically managers in this niche will look for stocks that pay 1% to 4% dividend yields in an effort to beat the yield on a benchmark like the S&P 500 (which stands at 2.5% at the moment). Of course, there are stocks that kick off higher rates. But higher rates can be a harbinger of risk. Indeed, Freddie Mac (FRE), the beleaguered mortgage giant, has an 18% yield. That stock isn't exactly a screaming buy. So even though 7% or 10% or 15% yields are intriguing, we wouldn't expect to see a bunch of those stocks in an equity-income portfolio. (If you do, you may want to take a closer look at the fund before buying in.)

Although the category has many positive attributes, it has hit some snags over the past year. The credit crisis has had a profound impact on financial-services stocks, traditionally an industry that pays healthy dividends and one that is a mainstay in equity-income funds. Standard & Poor's says there has been a 365% uptick in the amount of dividend decreases in 2008 vs. the same time period last year. Suspensions are also on the rise, too. In recent years some firms have started paying dividends, namely tech firms, and there have also been increases in 2008. But the data are a reminder that dividends aren't guaranteed. A company can decide to stop the payments at any time. What's more, we are in the middle of a close presidential election season. There's no telling whether a new administration, Republican or Democrat, will renew the Bush tax cut on dividends when it expires.

Nevertheless, the power of dividends is evident in this category's performance numbers. Equity-income funds as a whole have lost 13.4% in 2008, according to Lipper, vs. a 14.8% drop for S&P 500 index funds. Over the last five years equity-income funds have averaged an annual return of 6.7% vs. 5.2% for the S&P 500. That's exactly the kind of performance you would expect from these funds.

Some weeks we have trouble zooming in on one good fund to recommend to our readers. Not this week. We put our stamp of approval squarely on the 1st Source Monogram Income Equit (FMIEX). It is run by Ralph Shive, who we think is one of the most unsung fund managers in the country. Shive, who is based in South Bend, Ind., has a unique independent streak that separates him from the competition. He keeps an eye on broad investing trends that could impact certain sectors. He also is keen on valuation. He will look at traditional metrics like price/earnings along with competitive advantage and growth rates. Ultimately, he is looking to create a portfolio that has a yield 1.5% times that of the broad market. (Click here According to Morningstar, the fund's top holdings include Novartis (NVS), Marathon Oil (MRO), Johnson & Johnson (JNJ), Archers Daniels Midland (ADM) and General Electric (GE).

The criteria: The funds on our list fall into Lipper's equity-income category. They are open to new money, charge less than an annual 1.5% expense ratio and require a minimum investment under $5,000. In terms of performance, their track records put them in the top 40% of their category over the trailing three- and five-year time periods. As usual, we didn't include load funds.

See the Fund Screen Table

Source: Lipper
Note: Data as of Sept. 4, 2008

Recipe
Fund Classification = Equity Income
Annualized 3-Year Return (%) = Display Only
Rank in Classification (%) (3 year performance) <= 40
Annualized 5-Year Return (%) = Display Only
Rank in Classification (%) (5 year performance) <= 40
Expense Ratio <= 1.5%
Load Fund (type) = No Load
Minimum Initial Investment <= 5,000
Open to New Investors = Yes
Total Net Assets ($ millions) >=10
Year-to-Date Return (%) = Display Only