I created the Retirement Paycheck portfolio for investors who primarily want income from their inves...
This Fund Finds Quality, Growth and Income
05/31/2019 5:00 am EST
T. Rowe Price Dividend Growth Fund (PRDGX) is an actively managed mutual fund that seeks dividend income and long-term capital growth primarily through common stocks, notes fund expert John Persinos, contributing editor to Investing Daily's Personal Finance.
The fund currently invests 90.2% of its assets in U.S. equities, focusing on track records of paying or boosting dividends over time.
PRDGX is well-diversified, with a five-star rating from Morningstar. Portfolio manager Thomas J. Huber looks for companies with healthy payout ratios, plenty of cash on hand, and a history of earnings growth.
Many of the fund’s companies are familiar names that produce household brands. Because of their strong balance sheets and financial wherewithal, they tend to weather market ups and downs, providing investors with high streams of income as well as a defensive hedge.
These quality dividend payers should demonstrate greater resilience during the current environment of trade war uncertainty and market volatility.
In descending order, the top five sectors represented in the fund’s basket of stocks are health care (19.1%), financial services (18.3%), industrials (14.1%), technology (12.6%), and consumer cyclical (9.7%).
PRDGX’s top holding is Microsoft (MSFT), a long-time denizen of our Growth Portfolio. MSFT’s presence in PRDGX underscores how growth tech stocks are becoming dividend payers in their own right.
Ample free cash flow allows MSFT to continue its transition toward cloud-based services and a subscription business model, a strategic repositioning that’s paying off handsomely for this tech stalwart.
PRDGX’s number two holding is Visa (V), which has been in the vanguard of mobile payments and cyber security. With a roughly 50% market share by network purchase volume, Visa holds a dominant market position and is well insulated from its competitors.
The fund’s number three holding is JPMorgan Chase (JPM), which looks solid as measured by the major yardsticks of financial health: operating margin (39.3%); profit margin (31.4%); return on assets (1.2%); and return on equity (12.7%). These numbers largely outperform those of its peers.
You don’t have to be an income investor to love dividend-paying stocks. Dividend-payers are time-proven vehicles for long-term wealth building, but they’re also safe harbors in turbulent seas because companies with robust and rising dividends by definition boast the strongest fundamentals.
Think of dividend growth investing as a total return-focused equity strategy with a defensive bias. But here’s the challenge: it’s one thing to find a growing yield; it’s another to find one that’s sustainable.
PRDGX’s holdings have these qualities in common: market dominance; bullet-proof balance sheets; strong free cash flow; organic earnings growth; and high, growing dividends. The fund looks for companies with capital allocation policies that generate both a high dividend payout ratio and consistent growth.
If a company has the low debt and healthy cash flow required to throw off juicy dividends, it follows that the balance sheet is intrinsically sound enough to sustain the firm through corrections.
Companies only pay dividends if they believe that they are financially healthy enough. This results in a “natural selection” whereby only companies with strong and stable earnings streams decide to pay dividends.
What’s more, dividend-paying stocks typically boast above-average earnings growth. Research shows that many companies that don’t pay dividends misallocate capital towards projects that don’t benefit shareholders.
Requiring company executives to pay out cash dividends to shareholders imposes discipline on their management decisions and compels them to only invest in the highest-return projects. That’s why stocks with growing dividends are particularly appealing right now to both income and growth investors.
With a strong performance history over various time periods, PRDGX will continue to provide the right balance of safety, income and growth.
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