"He's demented!"

That's Charlie Munger's opinion of academic Jeremy Siegel. But we'll soon get to see just how demented the Wizard of Wharton actually is.

Put theory into practice
Siegel has signed on as a consultant and board member at WisdomTree, a new money management company with 20 exchange-traded funds (ETFs) that combine two of Siegel's favorite investment strategies: indexing and dividends. Siegel demonstrated in his recent book The Future for Investors that the 100 highest-yielding stocks of the S&P 500 outperformed the broader index by more than 3 percentage points annually from 1957 to 2003.

Now, with WisdomTree's offerings, we're going to find out whether this strategy can work going forward.

The guinea pig
The WisdomTreeDividend Top 100 Fund is one of the new Siegel-blessed ETFs. It is made up of the 100 highest-yielding companies in WisdomTree's LargeCapDividend Index. But unlike conventional indexes, the WisdomTree 100 is (a la Siegel) weighted by yield rather than market cap. Here are the fund's current top holdings.

Company

Current Yield

Weight Within Fund

Southern Copper (NYSE:PCU)

11.8%

4.05%

General Motors (NYSE:GM)

3.4%

1.83%

Lincoln National (NYSE:LNC)

2.7%

1.72%

Consolidated Edison (NYSE:ED)

5.1%

1.53%

Progress Energy (NYSE:PGN)

5.7%

1.50%

Reynolds American (NYSE:RAI)

4.2%

1.47%

Ameren
(NYSE:AEE)

5.0%

1.44%

Washington Mutual (NYSE:WM)

4.4%

1.43%

Xcel Energy
(NYSE:XEL)

4.6%

1.42%

AT&T
(NYSE:T)

4.8%

1.39%


We've long promoted the importance of dividends here at The Motley Fool. I've called dividend-payers good stocks to buy now, and we agree with Siegel that dividends can save you from losses while helping you beat the market.

Build a custom dividend portfolio
However, dividend investing isn't necessarily low risk. The Dividend Top 100 Fund, for example, might not be optimal for investors seeking both stable income and price appreciation. That's because the highest-yielding stocks on the market are also some of the most unpredictable. Of the above, GM is undergoing massive restructuring and recently cut its dividend, and Southern Copper can be highly cyclical, given its correlation to commodities markets.

In other words, if you can't stomach volatility, you probably don't want General Motors and Southern Copper accounting for nearly 6% of your portfolio.

The Foolish bottom line
Nevertheless, dividend investing can be a bona fide way to beat the market with less volatility and muted risk of total capital loss. Therefore, I recommend that Fools not only take a look at the WisdomTree offerings, but also at the iSharesDow Jones Select Dividend Index, as well as our own Motley Fool Income Investor service.

At Income Investor, Foolish analyst Mathew Emmert recommends two specific dividend payers each month and can help you build a portfolio of payers that fits your timeline and risk tolerance better than an index can. His picks yield more than 4% on average, and the entire portfolio is beating the S&P 500 by more than four percentage points (as Siegel predicts solid high-yielders should). You can click here to try the service free for 30 days and determine if -- like our thousands of members -- it's the right dividend option for you.

Tim Hanson does not own shares of any company mentioned in this article. No Fool is too cool for disclosure.