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A Solid, Defensive Dividend-Stock Fund

Focused on companies healthy enough to grow their payouts, Silver-rated T. Rowe Price Dividend Growth offers superior downside protection.

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 rarely thrills, but its advantages add up over time, earning the fund a Morningstar Analyst Rating of Silver.

Tom Huber has run the fund since 2000, following a consistent approach that focuses mostly 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 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. He vets portfolio candidates with a three-year outlook in mind, but stocks in the portfolio often stick around much longer than that--top-holding  Microsoft (MSFT), for example, has been a mainstay since the manager’s start.

The portfolio is diversified across more than 100 holdings and has broad sector exposure, though there are some preferences. For instance, Huber has shied away from the commodity-oriented energy sector, a good call over the past three years as the sector has underperformed. The fund is also typically light on technology names versus its S&P 500 benchmark, 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. Over the long haul, the fund’s superior downside protection has buoyed its returns relative to the S&P 500. Since Huber’s start through July 2018, the fund gained 7.8% annualized, outpacing the index’s 5.6% while keeping a lid on volatility. But it hasn't gained a noticeable edge over a dividend-focused benchmark: the fund's record is roughly in line with the Nasdaq US Dividend Achievers Select Index since that bogy's 2006 inception. The fund has slightly underperformed it in market declines while edging it in more bullish environments. Still, a long-tenured manager, sound process, and below-average fees should serve long-term investors well.

Process Pillar: Positive | Robby Greengold 08/15/2018
As its name suggests, 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.

Huber aims to keep the fund's yield above that of the S&P 500, but that goal isn't the sole driver. The fund will own stocks with paltry yields, particularly in the cyclically sensitive industrials sector. Huber likes low-yielding longtime holding  Roper Technologies (ROP), for instance, because its management teams have 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 high-yielding 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's 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-focused funds.

Although Tom Huber's focus on reasonably priced dividend-paying stocks gives the fund a value bent, 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. It has remained in the large-blend category during his tenure, though.

The manager's emphasis on competitively advantaged firms is clear. As of June 2018, 93% of the portfolio's assets were held by stocks with economic moats, according to Morningstar equity research.

Huber doesn't trade a lot; the fund's turnover generally ranges from 10% to 20% in a given year. The 100- to 120-stock portfolio is diversified, with positions typically under 3% of assets and the majority under 1%. Sector weightings don't stray too far from the S&P 500, though the fund typically owns relatively few tech firms since their yields are often measly. In recent years, the fund has been underweight in energy, as Huber thinks 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 benchmark. Cash is generally under 5% of assets but ticked up slightly in 2016 following strong inflows. However, with the strategy under $10 billion in assets and focused on large-cap stocks, capacity here is not a concern.

Performance Pillar: Positive | Robby Greengold 08/15/2018
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 temperate portfolio that's 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 and the November 2015-February 2016 drawdown. The fund has lost just 79% as much as the S&P 500 in downturns since Tom Huber took the helm in March 2000.

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 7.6% annualized gain through July 2018 beats the S&P 500's 5.6% and the category's 5.0%. What's more, the fund has been consistent: Its rolling three-year returns under Huber beat the category norm 86% of the time and have rarely landed in the bottom third. The fund's below-average volatility and its risk-adjusted performance is also quite good, warranting a Positive Performance rating.

The fund's returns roughly match the Nasdaq US Dividend Achievers Select Index, which has only been around since 2006, but the fund has looked competitive versus a smaller subset of dividend-oriented funds during Huber's tenure.

People Pillar: Positive | Robby Greengold 08/15/2018
Like many T. Rowe Price managers, Tom Huber has spent most of his career at the firm. He joined in 1994 as an analyst, covering various consumer companies ranging from retailers to leisure to gaming. After contributing to various funds as an analyst for several years, he took over this fund in March 2000. He also ran  T. Rowe Price Growth & Income (PRGIX) from 2007 until mid-2015, when a different manager took over. Huber's long, successful tenure on this fund and strong supporting resources result in a People rating of Positive.

Huber has access to T. Rowe's well-regarded global analyst team, which numbers more than 100. The analyst team has seen some changes in recent years, including in healthcare and consumer discretionary sector coverage, but the firm has managed through the changes well. Huber’s experience also helps compensate for any holes in coverage that result from changes on the analyst team.

While Huber makes all the portfolio decisions himself, 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) and  T. Rowe Price Real Estate (TRREX).

As of the most recent filings, Huber had more than $1 million invested in this fund.

Parent Pillar: Positive | 04/06/2017 
T. Rowe Price is evolving but retains the strong research-focused culture that's driven its long-term success. Despite the retirements of some long-tenured portfolio managers, the former CEO, and outgoing CIO Brian Rogers, the firm's careful focus on succession planning and long transition periods have eased the process. Even with a changing of the guard, there's no lack of talent. Successful former portfolio manager Rob Sharps is now co-head of global equities and oversees five CIOs who are among the firm's top managers. The analyst team is on solid footing, and the firm has continued hiring despite the pressures facing active managers. CEO Bill Stromberg, who joined T. Rowe in 1987 as an analyst, maintains an investment focus while recognizing that the business must evolve to flourish in an industry that's gravitated toward passive investing. The firm is bolstering its technology resources and is expanding its distribution overseas, achievable goals given its pristine balance sheet. In 2017, the firm opportunistically acquired the Henderson High Yield Opportunities team, led by a former T. Rowe employee, as it addresses demand for capacity-constrained strategies that are also part of its popular target-date lineup and potentially new multiasset products down the line (several T. Rowe strategies are closed). T. Rowe is sensibly adapting, and its fundholder-first mentality and ability to attract and retain investment talent support its Positive Parent rating.

Price Pillar: Positive | Robby Greengold 08/15/2018  
Like many T. Rowe Price funds, this offering's fees provide an edge. The no-load share class, which holds the majority of assets, has an expense ratio that lands in the cheapest quartile for similarly sold large-cap funds. The I shares, the next biggest share class, lands in the cheapest quintile of its peer group. The Advisor share class, which holds less than 5% of the fund's assets, isn't priced quite as competitively, with its expense ratio closer to the peer group norm. The fund's low-turnover approach helps keep transaction costs down, and brokerage commissions as a percentage of net assets are well below the category norm. Overall, it's a good deal and earns a Positive Price rating.

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