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Mutual Funds are an interesting beast when you get into dividend funds. Some investors feel that dividend funds are where to invest any and all amounts of money and this argument actually has some merit. After all, dividend-paying securities usually generate enough cash to make dividend payments and they are typically the largest stocks by market capitalization (though not always). But talk is cheap when it comes to investment management, so we came prepared to back up our argument for why dividend funds can take you from zero to hero in one year.

Some of the sweetest statistics around involve securities. Where mutual funds become a lot more attractive is in their management levels — you do not have to find the best dividend-paying securities because the fund manager will do all of that work for you.

The S&P 500 is a great starting point. Of thee 500 securities included in the S&P 500, 73.6% of them (or 368 of 500) pay dividends. That means that an Index fund alone will pay dividends within the fund.While this is not impressive on its own, consider that dividend funds will choose the best companies and, most likely, the best companies of those that pay highest-paying dividends.

The average dividend yield on the S&P 500 as of February 8, 2009 was 1.89%. Understandably, this is not a rate that would knock most people off their feet. The US Treasury Bond term that comes closest to such a yield is the 3-year Treasury. Go to 5 years and your Treasury Bond yield exceeds the average dividend yield on the S&P 500. Why does this matter? Well, nobody has ever been considered a hero by investing in 5-year Treasury Bonds and turning an “easy” hands-off rate of return that would make many people jealous (that being said, people who do pull off great returns investing this way are actually called genius or lucky, or probably both).

That average yield of 1.89% takes into account all S&P 500 securities, including the 132 that do no pay any dividends at all. The average dividend for those 368 securities that do pay dividends is actually 2.43%, better than the 5-year Treasury Bond rate of 2.31%. Now, 2.43% is a little better (much better than banks and investment houses will pay on a 1-year term deposit), but definitely not enough to make someone an investment “hero.”

So, how can one improve their dividend yield to something that would not only put even the 30-year Treasury Bond investor to shame, but would make all of your friends at the golf club blush with envy? Take a peek at the top-25 highest dividend companies where the average yield is actually 6.89%. Now we’re talking; that alone represents a more than one third of the 19% that the S&P 500 returned in all of 2009 (Jan-Dec).

Now, however, comes the question of “quality.” What do these top-25 dividend-paying securities have to offer? Are they on the brink of reducing their dividends? What do analysts think?

Well, Frontier Communications which has the most aggressive dividend yield is rated as a Hold on average by the 10 analysts surveyed by Thompson/First Call. On a year-over-year basis, Frontier is seeing growth in their quarterly earnings, although this is definitely nowhere near substantial enough to base an investment decision. What mutual funds hold Frontier outside of an Index fund? Reaves, DNP, and MFS are the largest holders.

Some of the other companies in this Top 25 include Verizon, Leggett & Platt, Eli Lilly and Integrys Energy. Obviously, these are all companies that most people have heard of, but whether they are worthy of hard-earned investment dollars is a decision often best-left to the mutual fund managers who have the resources to study every little detail of these securities.

So, in answering how dividend funds can take an average investor from zero to hero, consider that as of February 2010, these Top 25 securities in the S&P 500 are paying an average yield of 6.89%. That does not take into account any growth, which many of these shares have already given back. Next step is to short-list the dividend funds that actually perform and exceed standard performance levels.