Images: Investing yield © Photodisc, Getty Images

Dividend stocks were once viewed as so boring. My, how things have changed. Today, companies that pay dividends -- and the funds that invest in them -- are the things to own. Over the past year, investors have shoveled $19 billion more into funds that invest in dividend-paying U.S. stocks, while money flowing out of other kinds of stock funds exceeded money flowing in.

Firms that pay dividends are the "workhorses" of the stock market, says Morningstar strategist Josh Peters. Looking back over 100 years, Peters found that after inflation, more than 70% of the broad market's returns originated with the income that stocks generated each year.

But it's one thing to pay dividends; it's another to raise them like clockwork. The beauty of a well-executed dividend-growth strategy is that it not only provides a rising stream of income, it is also often accompanied by a rising share price.

Consider Abbott Laboratories (ABT), a diversified health care company. Ten years ago, Abbott paid an annual dividend of 92 cents a share and yielded about 3%. The current yearly payout rate is $2.04 a share. If you had bought the stock at $30 back then, your yield today on that price would be 6.8%. Meanwhile, the stock now trades at $64.

We sifted through dozens of portfolios, looking for the best mutual funds and exchange-traded funds that practice dividend-growth strategies. We found that no two dividend-growth funds are the same. Some work under strict guidelines that define rising growth -- for instance, annual dividend boosts of at least 10% a year for at least a decade -- while others will invest in companies that merely have the potential to start paying dividends.

In the end, we found three mutual funds and three exchange-traded funds that we like and that stay true to the same basic strategy.

At Vanguard Dividend Growth (VDIGX), manager Donald Kilbride doesn't spend much time checking on how the fund has done from day to day or even week to week. "I rarely look at performance until I have to talk to a client," says Kilbride, who became Dividend Growth's manager in February 2006. Once a month is as often as he'll check on the fund's returns.

Kilbride has guided his fund to market-beating results during a turbulent period for stocks. Over the past five years through June 29, Dividend Growth, a member of the Kiplinger 25, gained 3.3% annualized. That beat the Standard & Poor's 500 Index ($INX) by an average of 3 percentage points per year.

Kilbride employs a straightforward dividend-growth strategy. The 48 large companies in his portfolio, including ExxonMobil (XOM), Johnson & Johnson (JNJ), Microsoft (MSFT) and PepsiCo (PEP), epitomize the term high quality. Each is a leader in its industry, has a lot of cash and little debt, is run by smart managers and has a long history of hiking payouts. Kilbride prefers companies that boost dividends at least 10% annually; over the past 10 years, his fund's holdings have lifted their dividends by an average of 14% a year. Some raise their dividends at a slower rate, and others may boost their dividends at a rate of 40% over the next five years. Kilbride tries to balance the higher risk of the faster-growing companies with the lower risk of the steadier, slower-growing payers.

As a result, Dividend Growth tends to outpace the stock market in rocky years and lag when stocks are on a tear. In 2009 and 2010, for instance, the S&P 500 posted gains of 26.5% and 15.1%, respectively; Dividend Growth returned 21.7% and 11.4%. In 2008, the fund slid 25%, but that still beat the market by 12 percentage points. "People were saying, 'You had a great year,' " Kilbride recalls. "And I thought, 'But I've lost 25%.' I have an absolute-return mentality. I do the best I can relative to zero."

Tom Huber calls himself a "big believer" in dividend-growth investing. But that doesn't mean that every company in T. Rowe Price Dividend Growth (PRDGX), which Huber has managed since 2000, pays out cash -- Crown Castle International (CCI) is one such slacker. All of Huber's fund's holdings generate a lot of cash, however, and Huber will forgo current payments if a company uses its cash to buy back shares. Truth be told, nearly all of the 119 companies in the fund both pay a dividend and repurchase shares.

Huber doesn't pay much heed to payout ratios (the percentage of earnings paid as dividends) or yield per se. Rather, he hunts for undervalued companies that are well managed and sport higher profit margins and returns on capital and equity than others in their industries -- in other words, companies that are healthy enough to boost dividends. That said, Huber tries to better the yield of the S&P 500 by at least 0.15 percentage point before expenses; at 2.4%, the portfolio's pre-fee yield beats that of its benchmark by 0.4 point.

Like most dividend-growth funds, the T. Rowe Price product holds up well in shaky markets and lags in strong markets. Under Huber, the fund has returned 5.6% annualized over the past 10 years. That sneaks past the S&P 500 by an average of 0.3 point per year.

More from Kiplinger's Personal Finance magazine: