3 Great Dividend-Growth Funds

Susan Dziubinski: Dividend-growth stocks have a lot going for them. First, companies with growing dividends tend to be profitable and financially healthy—two valuable qualities during periods of economic slowdown. Such companies are also more likely to have competitive advantages that may allow them to pass along price increases and thereby maintain margins during inflationary times. And lastly, dividend-growth stocks tend to be less volatile than the overall stock market and are therefore attractive investments for playing a little defense.

Today we’re taking a look at three highly rated mutual funds and ETFs that buy dividend-growth stocks.

3 Great Dividend-Growth Funds

1. T. Rowe Price Dividend Growth Fund/ETF PRDGX TDVG
2. Vanguard Dividend Growth VDIGX
3. Vanguard Dividend Appreciation Index/ETF VDADX VIG

The first fund on our list of great dividend-growth funds is T. Rowe Price Dividend Growth. Earlier this year, Morningstar upgraded its Medalist Rating on the ETF and all of the mutual fund’s share classes to Gold, which is our highest rating. Tom Huber has managed this fund for more than two decades. He maintains a diverse portfolio of between 95 and 120 stocks. With a focus on dividend growth, the companies that Huber favors typically have durable competitive advantages and ample cash flows and are managed by solid management teams. The fund’s portfolio typically lands squarely in the large-cap blend portion of the Morningstar Style Box. Unlike some of his peers, Huber will sometimes continue to own a stock if the company fails to raise or even cuts its dividend. The fund’s trailing risk-adjusted performance is stellar, offering the relative downside protection an investor would expect from a dividend-growth strategy.

The next name on our list of great dividend-growth funds is Vanguard Dividend Growth. This actively managed Vanguard fund is subadvised by Wellington Management. Longtime current manager Don Kilbride will be retiring at the end of 2023, but we’re nevertheless maintaining our Gold Medalist Rating on the fund. Comanager Peter Fisher will take over the fund in January and continue to practice a disciplined, low-turnover approach. The fund focuses on just 40 to 50 dividend stocks whose businesses boast strong balance sheets, above-average returns on capital, and other competitive advantages. Management only invests when it can buy the stocks of these companies below their worth. This fund also lands squarely in the large-blend portion of the Morningstar Style Box, and about one third of the fund’s assets are held in its top 10 holdings. Despite its portfolio concentration, the fund has performed relatively well on the downside.

The final name on our list of great dividend-growth funds is an index fund, Vanguard Dividend Appreciation. The fund tracks the S&P U.S. Dividend Growers Index. The index includes U.S. stocks that have increased their dividends for at least a decade. It then tosses out the highest-yielding names in an effort to focus on financially stable companies. The index weights its holdings by their free-float-adjusted market cap and limits individual stock positions to 4% to promote diversification. The index includes more than 300 names. The fund charges razor-thin expenses, which only adds to its attractiveness. It too lands in the large-cap blend portion of the Morningstar Style Box and earns a Morningstar Medalist Rating of Gold.

Morningstar director Bryan Armour, senior analyst Stephen Welch, and analyst Paul Ruppe provided the research behind this segment.

Watch “3 High-Quality Stocks to Buy on Weakness” for more from Susan Dziubinski.