There’s more to the $13.7 billion T. Rowe Price Dividend Growth fund’s (PRDGX) investing approach than its name suggests.
Its longtime portfolio manager, Tom Huber, does favor companies that have the financial strength and durable businesses to grow their dividends steadily over time. At the same time, says Huber, 53, “we try to be a value buyer. We are looking for companies that we can buy at basically a good price.”
Huber has racked up strong performance in his nearly 20 years running the fund (PRDGX), which is classified by Morningstar as large-cap blend—a mix of growth and value. It has outperformed at least 75% of its Morningstar peers over the past three, five, and 10 years, with less volatility than its category average. The portfolio’s five-year annual return is 11.4%, versus 10.9% for the S&P 500 index (.SPX).
The fund hasn’t always outperformed, lagging behind the market as it rose in 2009 and 2010 as well as in 2012 and 2013. Huber, however, preaches patient investing, which dividends make easier. “If you are a longer-term investor, dividends are important and do matter,” he says.
During last year’s fourth-quarter market rout, for example, the fund returned minus 8.42%, more than four percentage points ahead of the S&P 500’s minus 13% result. “Dividend growth companies have outperformed the market at lower levels of volatility through market cycles,” Huber says.
In addition to trying to generate good returns, the fund keeps an eye on costs. Its net expense ratio is 0.64%—well below the Morningstar category average of 0.976%.
Huber joined Baltimore-based asset manager T. Rowe Price Group (TROW) as an analyst in 1994, straight out of a master’s program in security analysis at the University of Wisconsin. He grew up on a horse farm in a rural part of the Badger state. “We had a bunch of horses and plenty of work,” Huber recalls. His first job out of college was with a bank in North Carolina that became part of Bank of America (BAC). Working in commercial lending, Huber studied companies’ financials and began to develop an interest in stocks.
After joining T. Rowe Price, Huber worked with various seasoned fund managers, including Bill Stromberg, now the money manager’s CEO, and Bob Smith, a longtime growth manager who is now retired. Smith describes Huber as an even-keeled Midwesterner who can analyze information quickly. “Tom is good at discerning the signal from the noise,” he says.
Starting in the late 1990s, Huber worked closely with Stromberg, who had run the dividend growth fund since its founding in 1992. Huber took it over in March 2000, at the height of the dot-com investing bubble. Many investors at the time, he says, had lost sight of dividends’ importance: “Cash flow really didn’t matter.”
More recently, he has seen “huge changes in terms of how dividends are viewed,” he says. Company managers are paying more attention to payouts, and dividends have arguably become even more important to investors.
That shift in sentiment, he says, is partly due to low bond yields in recent years. Investors are also realizing “that getting a little bit of return on your investment every year is important and meaningful,” he says.
Huber strikes a balance in the fund between stocks with growing dividends and those with higher yields. “In some sectors like telecom, where we own AT&T (T), we are getting a much higher yield, but much lower growth of that dividend,” he says. The telecom stock yields 5.2%, compared with the S&P 500’s average of nearly 2%.
In contrast, another holding, Dollar General (DG), sports a yield of only 0.8%, but the dividend has been growing at double-digit rates.
Huber has the final say on what goes into the portfolio, but he relies heavily on some of the firm’s research analysts, whom he describes as “the source of idea flow.”
Partly as a way to reduce risk, Huber often likes to initiate holdings with smaller positions and then build them up if the company’s fundamentals continue to improve. Dollar General is one position he has bulked up. It recently was a top 15 holding, accounting for about 1.5% of the fund’s assets.
Another holding is Becton Dickinson (BDX), a global medical technology firm whose various products include catheters and syringes. The firm’s dividend growth rate has slowed recently in the wake of its roughly $24 billion acquisition of C.R. Bard in 2017. Last November, it declared a quarterly payout of 77 cents a share, up 2.7%.
One headwind: In 2018, the U.S. Food and Drug Administration sent the company a warning letter citing “several violations of federal law” related to marketing one of its products and failing to submit reports on time. The company said in August it “is working closely with the FDA” to address its concerns.
Huber still sees long-term value in the stock, which yields 1.3%. “You are getting a very good company that’s got a long track record of dividend growth, which should start to pick up again,” he says.
As of Oct. 31, the fund’s largest holding was Microsoft (MSFT), which initiated a dividend in 2003. Microsoft, he says, “made the transition from a company that was assumed to be on the wrong side of change a number of years ago to one that is a leader in the cloud.” The stock yields 1.4%, but the dividend has been growing at close to a double-digit clip recently—a reassuring sign that Huber likes to see.
“It is a tremendous value right now,” he says. “It will continue to compound for you in the future.”
|For more news you can use to help guide your financial life, visit our Insights page.|