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Be Patient With This Dividend Fund

One key to T. Rowe Price Dividend Growth's strategy is losing less in bad years.

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.

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%).

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.

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