Growth Beats Yield at This T. Rowe Price Mutual Fund

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Context is everything. For more than a year now, a handful of companies – some of which don't pay a dividend – have fueled gains in the stock market, leaving funds that don't hold those companies behind.

That goes a long way to explain why the T. Rowe Price Dividend Growth Fund (PRDGX) – a member of the Kiplinger 25, our favorite no-load mutual funds – has lagged the S&P 500 over the past 12 months.

The fund owns Microsoft (MSFT) and Apple (AAPL), but not Nvidia (NVDA), Alphabet (GOOGL) or Meta Platforms (META), three of the biggest gainers over the past year. "It's been a tough relative period for anyone who's an income-oriented investor," says the fund's manager, Tom Huber. "But on an absolute basis, the fund has done well." Dividend Growth has gained 16.3% over the past 12 months; the S&P 500, 21.5%.

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Increasing dividends matter more than yield at this fund. Huber favors large, competitively positioned firms that generate cash and have a goal to increase payouts over time. The fund's overall average dividend growth rate, 9.8% over the past 12 months, exceeds that of the S&P 500, which typically ranges between 5% and 7%, says Huber.

High interest rates have also been a hurdle for this dividend-stock fund; investors can earn fatter yields in money market funds. But rates are likely to fall in the coming months, which may turn investor attention toward dividend stocks again, says Huber.

Meanwhile, Huber is nibbling in discounted sectors, including consumer staples, energy and healthcare. Coca-Cola (KO) is a "quality company," he says, "that trades at a price-earnings multiple you haven't seen in a really long time."

And since the collapse of oil prices during COVID, many energy stocks, including Conoco-Phillips (COP), yielding 2.9%, and Exxon Mobil (XOM), yielding 3.2%, have become smarter about how they spend their extra cash. He's also a fan of discount retailer Dollar General (DG), which is benefiting from consumers seeking relief from higher prices.

Note: This item first appeared in Kiplinger Personal Finance Magazine, a monthly, trustworthy source of advice and guidance. Subscribe to help you make more money and keep more of the money you make here.

Nellie joined Kiplinger in August 2011 after a seven-year stint in Hong Kong. There, she worked for the Wall Street Journal Asia, where as lifestyle editor, she launched and edited Scene Asia, an online guide to food, wine, entertainment and the arts in Asia. Prior to that, she was an editor at Weekend Journal, the Friday lifestyle section of the Wall Street Journal Asia. Kiplinger isn't Nellie's first foray into personal finance: She has also worked at SmartMoney (rising from fact-checker to senior writer), and she was a senior editor at Money.