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Finding the True Champions of Dividend Growth Continued From Page 7

8

Raising the Bar

With specialized dividend-oriented index funds, we can see who’s really adding value with dividend-growth funds. As you can see, Vanguard Divi- dend Appreciation Index has been an even tougher benchmark than the S&P 500. Not many funds have outlegged it.

Div Achiever Alpha 05/01/2006 –03/31/04

Morningstar Risk-Adj Ret % 05/01/06 –03/31/14

Return % 05/01/06 –03/31/14

Sortino Ratio 05/01/06 –03/31/14

Std Dev 10/01/07 –03/31/14

Name

Vanguard Dividend Growth

8.91

1.60

5.59

0.88

14.12

Amana Income

8.59

1.62

5.47

0.92

13.55

Columbia Dividend Income

7.61

0.18

3.38

0.72

14.81

Vanguard Dividend Apprec Idx

7.48

-0.13

4.01

0.70

14.93

ClearBridge Appreciation

7.40

0.02

3.19

0.71

14.90

T. Rowe Price Dividend Growth

7.36

-0.50

3.46

0.65

16.27

BlackRock Equity Dividend

6.89

-0.53

2.60

0.64

15.44

S&P 500 TR USD

6.88

-1.31

2.66

0.58

17.44

Fidelity Dividend Growth

6.86

-2.23

0.91

0.52

22.36

Franklin Rising Dividends

6.54

-0.95

2.24

0.60

15.25

Vanguard Growth & Income

5.90

-2.32

1.52

0.48

17.86

Fidelity Equity-Income

4.61

-3.98

-0.28

0.37

19.75

Fidelity Equity Dividend Income

4.22

-4.31

-0.50

0.34

19.36

The average fund in the custom dividend-growth sample edged the Russell 1000 Value in absolute terms and posted positive alpha versus that bench- mark, but its results deteriorated versus the Russell 1000 and even more so against Dividend Achievers Select. The typical fund in the group lagged both more-corelike bogies and showed negative alpha when pitted against them. The typical sample fund also posted weaker results against risk-adjusted measures like the Sharpe ratio, the Sortino ratio, and Morningstar Risk-Adjusted Returns versus the Dividend Achievers benchmark. That’s bad news for dividend-growth strategies that are used to being compared to the Russell indexes, but good news for investors trying to separate the managers who are truly adding value from those who employ more-mechanical and easily duplicated approaches. In this test, Morningstar 500 denizens Amana Income AMANX and Vanguard Dividend Growth VDIGX emerged as candidates for the former group. Columbia Dividend Income LBSAX came close.

Broad-based stock-picking success helped Vanguard Dividend Growth and Amana Income. Neither port- folio had any home runs, but rather a series of small successes across industries during the period, including Nike NKE , Bristol-Myers Squibb BMY , and Microsoft MSFT . Both funds did themselves a favor by avoiding financials during the crisis— Vanguard Dividend Growth by choice and Amana Income by structure. As an Islamic fund, Amana can’t own financials or debt-heavy firms. Both funds have solid long-term strategies. Don Kilbride runs a more compact, almost exclusively large-cap portfolio at Vanguard, while Amana’s Nick Kaiser will hold more stocks, including mid-caps. Columbia Dividend Income lagged Dividend Achievers in absolute terms but looked competitive on some risk-adjusted measures. It had positive alpha and matched the indexes’ Sortino and Sharpe ratios. Its larger-than-average helping of wide-moat, or com- petitively advantaged, companies compensated for stakes in financials like Citigroup and Lincoln National LNC that hurt the fund during the period, according to Morningstar attribution analysis. One of the fund’s longtime managers retired, but remaining