Among the Best Dividend-Growth Funds

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 steadiness supports its Morningstar Analyst Rating of Silver.

A veteran manager has helped buoy it. Tom Huber has run the strategy since March 2000, utilizing T. Rowe Price's first-rate global analyst team, which supports 18 equity funds with Morningstar Analyst Ratings of Silver or Gold. He also works with an investment advisory committee that provides guidance on his investment theses.

Huber follows a consistent time-tested approach. It focuses on dividend-paying firms that are financially healthy enough to sustain or grow their payouts. 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 investment theses to play out. Huber identifies portfolio candidates with a three-year outlook in mind but often holds stocks much longer than that--top holding Microsoft MSFT, for example, has been a mainstay since he started.

The portfolio is diversified across more than 100 holdings and has broad sector exposure, albeit with some preferences. Huber has shied away from the commodity-oriented energy sector, a good call in recent years as the sector has underperformed. The fund's Microsoft position notwithstanding, it is also typically light on technology names versus the S&P 500 index, as those firms traditionally have been less likely to pay out dividends. This diversified nature and tendency to avoid more-speculative names in favor of dividend-payers has led to a muted risk profile.

The fund has served its long-term investors well. From Huber’s early 2000 start through May 2019, the fund’s 7.5% annualized gain beat the S&P 500’s 5.3%, thanks to superior downside protection. On the other hand, it has edged the Nasdaq U.S. Dividend Achievers Select Index since that benchmark’s 2006 inception, thanks to better participation in up markets. It remains a strong option.

Process Pillar: Positive | Stephen Welch, CFA 07/08/2019 True to its name, this fund focuses on companies that are financially healthy enough to increase their dividends over time. As a result, it favors firms that generate high levels of free cash flow, an attribute that's buoyed the fund (in relative terms) during market pullbacks. Manager Tom Huber's consistent execution helps the fund earn a Positive Process rating.

While Huber’s focus is on dividend growth, he is cognizant of dividend yield when looking at the overall portfolio, targeting a 200- to 250-basis-point yield. This leads the fund to hold stocks with a range of yields. For example, Huber likes low-yielding longtime holding Roper Technologies ROP, for instance, because its management team has done a good job of reinvesting in the businesses and making smart, shareholder-friendly acquisitions. Along the same lines, Huber won't hold a large position in a stock simply because of its yield and trims names as their prices appreciate.

The fund generally won't have one of the highest yields in the large-blend category, and its yield can be lower than some of its dividend-focused peers', but it is bound to be above average relative to large-blend funds over time. Huber's emphasis on nonyield characteristics, including valuation, growth prospects, and management, has provided a performance edge and made the fund less volatile than its typical large-blend peer. It has a similar risk profile to other dividend-growth funds.

Tom Huber constructs a diversified portfolio of 100-120 stocks, with an emphasis on large, competitively advantaged firms that can grow dividends. As of May 2019, 85% of its assets were held by stocks with wide or narrow Morningstar Economic Moat Ratings, according to Morningstar Equity Research Services LLC.

Huber's focus on reasonably priced dividend-paying stocks gives the fund a value bent, but his preference for market leaders with high returns on equity and capital has edged the fund closer to the growth side of the Morningstar Style Box in recent years. That has kept it in the large-blend Morningstar Category during his tenure.

Sector weightings don't stray too far from the S&P 500, though the fund typically has been underweight information technology, but less so lately due to a reclassification of some stocks into communication services. In recent years, the fund has 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 and financials stakes than the index.

Huber exhibits patience in his investments, keeping the fund's turnover low, normally ranging from 10% to 20% in a given year. Cash is generally under 5% of assets but ticked up slightly in 2016 following strong inflows, but with the strategy under $12.5 billion in assets, capacity not constrained.

Performance Pillar: Positive | Stephen Welch, CFA 07/08/2019 The fund's below-average volatility and its risk-adjusted performance merit a Positive Performance rating.

The fund's focus on companies that are financially healthy enough to pay a dividend--and potentially increase it over time--has led to a portfolio that has been resilient in down markets. Indeed, it fared better than the S&P 500 and most large-blend peers in both the early-2000s bear market and the late-2007 to early-2009 financial crisis, as well as during 2011's market pullback. In 2018’s near bear market between Sept. 21 and Dec. 24, the fund’s 15.1% loss was 4.2 percentage points better than the S&P 500.

The trade-off is that the fund can look sluggish in rising markets like 2009, 2010, 2012, and 2013; it landed in the category's bottom half all four years. That hasn't dented its long-term record, though. Since Huber's start, the fund's 7.5% annualized gain through May 2019 beat the S&P 500's 5.3% and the category norm's 4.7%. What's more, the fund has been consistent: Its rolling three-year returns under Huber beat the category average 91% of the time and have rarely landed in the bottom third.

The fund's returns through May 2019 have slightly edged the Nasdaq US Dividend Achievers Select Index, which has only been around since 2006. During Huber's tenure, the fund is in the top decile of large-blend peers for annualized return.

People Pillar: Positive | Stephen Welch, CFA 07/08/2019 Huber's long, successful tenure on this fund and strong supporting resources result in a People rating of Positive. 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. He also put up competitive risk-adjusted results at T. Rowe Price Growth & Income PRGIX from 2007 until mid-2015, when another manager took over.

Huber has access to T. Rowe's well-regarded global analyst team. It numbers more than 100 and supports 18 equity funds with Morningstar Analyst Ratings of Silver or Gold. The analyst team has navigated several coverage transitions in recent years, including in healthcare and consumer discretionary, but the firm has managed through these changes well. Huber’s experience also helps compensate for any holes in coverage that result from fluctuations on the analyst team.

Huber has other resources besides T. Rowe’s analyst team. He works with an investment advisory committee that oversees the fund on a high level. Huber also sits on other managers' investment committees, including those for T. Rowe Price Blue Chip Growth TRBCX, T. Rowe Price Equity Income PRFDX, and T. Rowe Price Real Estate TRREX.

Huber invests more than $1 million here.

Parent Pillar: Positive | 10/01/2018 T. Rowe Price remains best-in-class, earning a Positive Parent rating. The firm's success is rooted in its fundamental approach to active management and deep analyst bench. Investors benefit from managers' generally long tenures at the firm, well-planned manager transitions, reasonable costs, and attention to capacity. Many top executives, including CEO Bill Stromberg, rose from the analyst ranks, which helps keep a focus on investors at the forefront, even as the firm expands its distribution footprint outside the United States and bolsters its technology resources. The investment side has received resources, too. The multi-asset team has grown in size, reflecting its importance to the firm's future beyond the esteemed target-date lineup. Despite headwinds facing active managers, T. Rowe remains a powerhouse within U.S. and international equities. Fixed income is an area to watch. Several long-tenured managers have recently retired or will do so soon. Sound succession planning has smoothed the transitions, but the firm needs to ensure the bench remains deep. While high-yield and municipal bonds remain bright spots, the fixed-income team has not yet shown sustainable success in inching beyond its conservative bottom-up approach at some core strategies. Plus, the firm's foray into alternatives is unproven. Overall, though, T. Rowe Price retains the sensible and investor-focused culture that has long driven its success.

Price Pillar: Positive | Stephen Welch, CFA 07/08/2019 Like many T. Rowe Price offerings, this one's modest fees provide an edge over most peers and earn the fund a Positive Price rating.

The no-load shares’ expense ratio applies to the majority of assets and lands in the cheapest quartile of similarly sold large-cap funds. The I shares, the next biggest, have an expense ratio in the cheapest quintile of their peer group. True, the Advisor shares' expense ratio is closer to the peer group norm, but they hold less than 3% of the fund’s assets.

A cheap price tag isn't this fund’s only advantage. Its low-turnover approach helps keep transaction costs down, and brokerage commissions as a percentage of net assets are well below the category norm. Plus, the fund’s 2018 capital gains distribution was less than 2% of net asset value.