Be Patient With This Dividend Fund

Many investors consider buying stocks in firms that steadily raise their dividends to be an all-weather strategy. In truth, funds that focus on dividend-growth stocks tend to hold up better than the broad market in stormy times, although they often lag when skies are clear.

T. Rowe Price Strategist: Best Investments to Own in an Expensive Market

Take T. Rowe Price Dividend Growth (symbol PRDGX). Although the fund delivered respectable results over the past year, it trailed Standard & Poor’s 500-stock index by 3.3 percentage points. The fund lost ground after last November’s election as investors, expecting improved economic growth, ditched high-quality, dividend-paying stocks for riskier fare, says Bill Nolan, a Price executive who works closely with Dividend Growth’s manager, Thomas Huber. Another factor that has hurt the fund’s relative results: a shortage of technology stocks, which have performed strongly for most of the past year. Tech stocks account for just 12% of the fund’s assets, compared with 22% in the S&P 500.

Of course, you can’t deliver a double-digit return without some good stock picks. Strong gains in financial-services shares helped the fund, led by Morgan Stanley (up 66% over the past 12 months), State Street (44%) and TD Ameritrade Holding (54%).

From just $107.88 $24.99 for Kiplinger Personal Finance

Become a smarter, better informed investor. Subscribe from just ~~$107.88~~ $24.99, plus get up to 4 Special Issues

CLICK FOR FREE ISSUE

https://cdn.mos.cms.futurecdn.net/flexiimages/y99mlvgqmn1763972420.png

Sign up for Kiplinger’s Free Newsletters

Profit and prosper with the best of expert advice on investing, taxes, retirement, personal finance and more - straight to your e-mail.

Profit and prosper with the best of expert advice - straight to your e-mail.

Huber favors large, sturdy firms with solid balance sheets that generate strong free cash flow (cash profits after capital expenditures) and can consistently raise payouts. JPMorgan Chase, Microsoft and health insurer UnitedHealth Group topped the portfolio’s list of 109 stocks as of June 30.

When Huber buys, he holds for a long time. His fund’s annual turnover of 11% suggests an average holding period of nine years. “You can make a mistake by selling something just because it has done well,” he says. Valuations matter, but strong stock performance, a good corporate culture and a management team that’s executing well are signs of a durable business, he says.

Over the long haul, Huber has outpaced the market, in part by losing less in bad years. For instance, in 2008, his fund lost 33%; the S&P 500, 37%. From March 2000, when Huber became manager, through July 31, Dividend Growth earned 7.1% annualized, topping the S&P 500 by an average of 2.2 percentage points per year.

Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.