7
Morningstar FundInvestor
May 2
014
It pays to take a harder look at actively managed divi-
dend-growth funds.
Investors generally like dividends, and who doesn’t
like growth? Put them together in a stock portfolio or
in the name of a fund and they convey stability,
quality, sober management, downside protection, and
a growing stream of income for retirement.
We grouped funds that invest in companies that pay
dividends and have the business models and cash
flow that enable them to continue raising them. We
found those funds’ returns have kept pace with the
S
&
P
500
Index and the average domestic-stock fund
from the market’s October
2007
pre-financial crisis
to the end of March
2014
with less volatility. We aren’t
the only ones to notice, as dividend-growth funds
have attracted nearly $
10
billion in net inflows in the
past five years through March
2014
.
Not all dividend-growth fund records stand up to
increased scrutiny. It’s true many funds have been
able to set themselves apart from traditional bench-
marks such as the Russell
1000
and the Russell
1000
Value indexes by leaning toward stocks that
pay sustainable and growing dividends, or at least
declaring that they do so. Focusing on such fare has
worked well over the long term for several funds
in the Morningstar
500
. Funds like
T. Rowe Price
Dividend Growth
PRDGX
have beaten the Russell
1000
and the S
&
P
500
by building portfolios with
a better mix of dividend yield, valuation, and growth
than those bogies. We raised the bar on the whole
group by comparing them with dividend-growth
indexes and index funds to see whether they add
value above and beyond the passive options.
Besides the traditional Russell
1000
and Russell
1000
Value indexes, we measured funds versus the
Nasdaq
US
Dividend Achievers Select Index. The trial
screened for distinct large-blend and large-value
funds with
12
-month yields of less than
150%
of the
broad U.S. stock market (about
2
.
5%
at the time of
the test) that had the words “dividend” or “income”
in their names—we threw out some that were more
focused on yield, such as
AllianzGI NFJ Dividend
Value
PNEAX
, and added a couple of others whose
strategies were more dividend-growth-focused,
such as
American Funds Washington Mutual
AWSHX
. It turned up more than
120
funds, about
93
of which had track records long enough for the
measuring period and more than a dozen of which
are in the Morningstar
500
.
The comparison examined the absolute and risk-
adjusted performance of this group relative to the
Nasdaq
US
Dividend Achievers Select Index from
May
2006
to the end of March
2014
. That’s short in
statistical terms but roughly the published life of
that index and also a period encompassing a market
peak, trough, and recovery. A lot of dividend-focused
indexes have been rolled out in recent years to
serve as the basis for new exchange-traded funds.
I chose Dividend Achievers Select for its simplicity,
longevity, and credibility. A fund tracking that bench-
mark,
Vanguard Dividend Appreciation Index
VDAIX
—available as an
ETF
and an open-end fund—
also is a favorite of Morningstar’s passive strategies
analysts for its high-quality portfolio.
The market-cap-weighted benchmark is based on
the old Mergent Dividend Achievers list of stocks that
have raised their dividends for
10
consecutive years.
The index, however, uses some quality screens devel-
oped at the behest and with the help of Vanguard
that weed out stocks with unsustainable dividends.
The screens kicked out
Citigroup
C, for instance,
in
2006
—two years before the bank slashed its divi-
dend in the midst of the financial crisis (though
it kept
American International Group
AIG
and
other financials).
Finding the True Champions of
Dividend Growth
Morningstar Research
|
Daniel Culloton
Continued on Page 8
