Growth and income (G&I) investors have long struck a balance between capital appreciation and yield. These investors have accepted that they may have to sacrifice some potential return on the front and back end to achieve both current income and capital appreciation.

But over the past 18 months, the yields on many G&I funds have failed to keep pace with the category’s average 1.9 percent yield, to say nothing of the 2.1 percent yield currently offered by the S&P 500.

Fund managers have faced a dilemma over the past two years. The S&P 500 returned 26.5 percent in 2009 and more than 15 percent last year, presenting fund managers with two options: let winners ride and see their fund’s yield fall, or rotate to out-of-favor names in order to boost yield while taking on more risk.

To discover funds that strike the best balance between the two objectives, we recently ran a screen to uncover all G&I funds eligible for inclusion in The Rukeyser 100.

That screen produced a universe of 97 funds, 16 percent of which offered yields in line with or higher than the category average. Of those better-yielding funds, most offerings were chronic underperformers in terms of total return.

Most G&I investors have an eye toward capital preservation, so we ran another screen to identify funds that fared well during the financial crisis and participated in the last rally. Three stood out on this list (see “The 60-Plus Club”).

The Three Winners

With a yield of 1.9 percent, Vanguard Dividend Appreciation Index (VDAIX, 877-662-7447) may not be a barn burner when it comes to capital appreciation or high yields. But it fares reasonably well on both counts and at least meets its category average.

The fund invests only in companies that have increased dividends in each of the past 10 years. The portfolio comprises names that are both profitable and financially sound–primarily blue-chip companies such as Chevron Corp (NYSE: CVX), Coca-Cola (NYSE: KO) and IBM (NYSE: IBM) that hold leading positions in their respective industries.

These holdings give Vanguard Dividend Appreciation Index a solid foundation. When the S&P 500 lost more than a third of its value in 2008, Vanguard Dividend Appreciation declined just 26 percent. But the fund tends to flag when markets rally, capturing anywhere from a third to half of the upside. This is a trade-off that G&I investors have made for years.

Of our three favorites, Vanguard Dividend Appreciation has the weakest performance on a one- and three-year basis. But the fund’s yield is in line with the category average. A rock-bottom expense ratio of 0.35 percent makes Vanguard Dividend Appreciation an excellent core holding for any G&I portfolio.

The top-performing fund identified by our screens is Ave Maria Rising Dividend (AVEDX, 888-726-9331), a morally responsible fund managed in line with the teachings of the Roman Catholic Church. Despite a generally mediocre performance, the fund’s 22 percent loss in 2008 ranked in the top 2 percent of its category–vaulting Ave Maria to the top of our screens.

Moral and religious issues are beyond the scope of this publication. But investors considering the Ave Maria family of funds should recognize that its mandate excludes a number of solid dividend-paying stocks. These companies for one reason or another have run afoul of the Church’s values. The fund’s performance should lag its peers significantly as time mutes the effect of its stellar 2008 performance.

Ave Maria Rising Dividend’s annual expense ratio of 1.11 percent is also quite high for a fund of this type. Nonetheless, the fund offers a respectable yield and could make a good portfolio addition for investors who share the church’s beliefs.

The final fund to make the cut is California Investment Equity Income (EQTIX, 800-225-8778).

Management employs a large-cap value strategy that focuses predominately on blue-chip stocks. California Investment Equity Income’s holdings include familiar industry leaders such as Chevron Corp, ExxonMobil Corp (NYSE: XOM), Goldman Sachs (NYSE: GS) and JPMorgan Chase (NYSE: JPM). Manager Stephen Rogers constructs his portfolio with the aim of marginally outperforming the S&P 500 on a consistent basis.

It’s a strategy that’s paid off for Rogers. California Investment Equity Income has consistently ranked within the top third of its category over the past three years. Its value focus helped the fund outperform 89 percent of its peers during the 2008 downturn.

California Investment Equity Income has also benefited from savvy sector weightings. Management was overweight industrial materials, energy and manufacturers just in time to catch the market turn. In 2008 the fund slashed its 28.9 percent allocation to financials by more than half, sparing shareholders considerable pain as the worst of the financial crisis worked through the system.

Management won’t always time the market this accurately. But its focus on valuations and track record of prudent moves makes this fund an excellent long-term holding for G&I investors.

Investors seeking to combine elements of growth and current income to their portfolios will always have to sacrifice a little of each. But by doing your homework, you won’t shortchange your retirement.