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A Terrific, Time-Tested Dividend-Growth Fund

An upcoming organizational change isn't a concern for Silver-rated T. Rowe Price Dividend Growth.

The following is our latest Fund Analyst Report for T. Rowe Price Dividend Growth (PRDGX). Morningstar Premium Members have access to full analyst reports such as this for more than 1,000 of the largest and best mutual funds. Not a Premium Member? Gain full access to our analyst reports and advanced tools immediately when you try Morningstar Premium free for 14 days.

T. Rowe Price Dividend Growth's longtime manager continues to reward investors with a strategic, time-tested approach, earning it a Morningstar Analyst Rating of Silver across all share classes.

Manager Tom Huber's tenure on this fund stands out among peers. Running this strategy since March 2000 lands him in the large-blend Morningstar Category's most experienced decile. Along the way, Huber has drawn on T. Rowe Price's first-rate analyst team and an advisory committee that provides guidance on his investment theses.

An upcoming organizational change will affect the supporting cast, but it's not a cause for concern. T. Rowe Price announced in November 2020 that it plans to split its investment research firm into two in 2022's second quarter. Huber will lose a handful of analysts he typically works with, but the firm has enough time to get appropriate resources in place.

Huber believes dividend growers offer outperformance with lower volatility. Financial health, which is necessary to sustain above-average payout growth, is a prerequisite for new ideas. Beyond that, he looks for companies with durable competitive advantages, ample cash flow, and sound management teams that allocate capital with shareholders' interests in mind, whether that's through dividends or buybacks.

Huber, a believer in mean-reversion, is a patient investor as he waits for his theses to play out. Huber identifies portfolio candidates with a three-year outlook in mind, but often holds stocks much longer than that. For example, top holding Microsoft (MSFT) has been a mainstay since he started.

The fund has served its long-term investors well. From Huber's early 2000 start through April 2021, the no-load shares' 8.5% annualized gain beat the S&P 500's 6.8%, thanks to superior downside protection. For example, the fund outperformed the index during 2020's coronavirus-driven pullback. It also edged the Nasdaq US Dividend Achievers Select Index since that bogy's 2006 inception, thanks to better participation in up markets. It remains a solid option.

Process | Above Average

Consistent execution helps the fund earn an Above Average Process rating. True to its name, this fund focuses on companies that are financially healthy enough to increase their dividends over time. As a result, manager Tom Huber favors firms that generate high levels of free cash flow, an attribute that's buoyed the fund (in relative terms) during market pullbacks. He maintains a dividend-growth rate that on average is about 250 basis points higher than the S&P 500's.

While Huber focuses on dividend growth, he still targets a dividend yield for the overall portfolio of 200-250 basis points. This leads the fund to hold individual stocks with a range of payouts relative to their share prices. For example, Huber likes low-yielding longtime holding Roper Technologies (ROP) because its management team has done a good job of reinvesting in the businesses and making smart, shareholder-friendly acquisitions. He won't hold a large position in a stock simply because of its yield, though.

In times of heightened uncertainty, Huber emphasizes nonyield characteristics, including valuation, balance-sheet strength, and management, which provides diversification. While this can reduce total yield, Huber believes it helps the portfolio participate more in the upside and has made the fund less volatile than its typical large-blend category peer.

Huber constructs a diversified portfolio of 100-120 stocks, with an emphasis on large, competitively advantaged firms that can grow dividends. As of March 2021, more than 85% of portfolio assets were in large- or giant-cap names and more than 90% were in stocks with wide or narrow Morningstar Economic Moat Ratings.

Sector weightings don't stray too far from the S&P 500's, though the fund typically has been underweight in information technology and communication services. Within tech, Huber prefers mature software and services firms, such as longtime holdings Microsoft and Visa (V). The fund has also been underweight in energy, as Huber finds it harder in commodity-driven sectors to find good companies that can sustain earnings and cash flow growth. Meanwhile, it has held larger healthcare, industrials, and financials stakes than the benchmark. Within healthcare, he tends to gravitate to healthcare equipment and supplies firms and healthcare providers, such as Danaher (DHR) and UnitedHealth Group (UNH).

Huber invests for the long haul. Indeed, annual portfolio turnover has ranged from 7% to 17% the past five years, which is well below the category median. He typically keeps cash under 5% of assets and has very little exposure to non-U.S. stocks.

People | Above Average 

This strategy benefits from a distinguished, long-tenured manager with strong supporting resources. It receives an Above Average People rating.

Tom Huber has over 25 years of investment experience, all but one with T. Rowe Price. He joined the firm in 1994 as an analyst, covering various consumer companies ranging from retailers to leisure to gaming. After contributing to various funds for several years, he took over managing this fund in March 2000, which lands him in the top 5% of the longest-tenured managers in the large-blend category. He also put up competitive risk-adjusted results at since-merged T. Rowe Price Growth & Income from 2007 until mid-2015, when another manager took over.

Huber has access to T. Rowe Price's well-regarded global analyst team. It numbers more than 100, but the firm announced in November 2020 that it plans to split its organization into two in 2022's second quarter. Huber will lose access to some of the analysts he frequently works with, but the firm has ample time to fill in the gaps with additional support. He will remain well-resourced.

Huber has other resources besides T. Rowe Price's analyst team. He works with an investment advisory committee that oversees the fund on a high level. He also regularly meets with a handful of large-blend-focused portfolio managers at the firm to discuss overlapping holdings.

Huber invests more than $1 million in the fund.

Parent | High 

T. Rowe Price remains well-positioned in an increasingly competitive industry, earning a High Parent rating. The firm has withstood the headwinds facing active managers with its rigorous research process, strong performance across asset classes, and continued investment in its research team. Head count grew 9% in 2019, and T. Rowe's debt-free balance sheet gives it flexibility to keep hiring amid an economic slowdown, as it did in past downturns. A build-out of its multi-asset team in recent years supported enhancements to its prized target-date suite in 2020, and the firm has bolstered its quantitative capabilities for internal and external use. While T. Rowe Price typically home-grows its talent, it has made several experienced equity analyst hires in key sectors lately. This strengthened analyst bench has allowed the firm to capably handle expected manager retirements with its characteristically smooth transitions as well as the rare surprise loss, such as when star manager Henry Ellenbogen left to start his own firm in 2019.

T. Rowe Price is evolving from a business standpoint. It's broadening distribution outside the United States, expanding its environmental, social, and governance capabilities, and planning for semitransparent exchange-traded funds. Yet it brings a measured, thoughtful approach to strategy launches and capacity management, with fundholders' interests at the forefront.

Performance 

Tom Huber has delivered below-average volatility and strong risk-adjusted performance during his tenure.

The fund's focus on companies that are financially healthy enough to pay a dividend has led to a portfolio that's been resilient in down markets. Indeed, it fared better than the S&P 500 and most large-blend peers in most market corrections under Huber, including the early-2000s bear market, the late-2007 to early-2009 financial crisis, and the late-2018 near bear market. The fund also outperformed in 2020's coronavirus-driven market pullback, though not by as much as expected given the nature of the decline.

The trade-off is that the fund can look sluggish in rising markets like 2010, 2012, 2013, and 2017; it landed in the category's bottom half all four years. That hasn't dented its long-term record, though. Since Huber's April 2000 start, the no-load shares' 8.5% annualized gain through April 2021 beat the S&P 500's 6.8% and the large-blend category norm of 5.6%. What's more, the fund has been consistent: Its rolling five-year returns under Huber beat the category average 85% of the time and have rarely landed in the bottom third.

The fund's returns through April 2021 also edged the Nasdaq US Dividend Achievers Select Index, which has only been around since 2006. During Huber's tenure, the fund lands in the category's top decile.

Price

It's critical to evaluate expenses, as they come directly out of returns. The share class on this report levies a fee that ranks in its Morningstar Category's second-cheapest quintile. Based on our assessment of the fund's People, Process, and Parent Pillars in the context of these fees, we think this share class will be able to deliver positive alpha relative to the category benchmark index, explaining its Analyst Rating of Silver.

Stephen Welch does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.