There is an abundance of investment research that shows the power of dividend growth. One study conducted by the Brandes Institute showed that from 1926-2003 dividends represented 43% of total U.S. equity returns during that time frame. Moreover, widely regarded economist Dr. Jeremy Siegel, professor at the University of Pennsylvania Wharton School, calculated that the highest-yielding quintile of the S&P 500 Index produced a 14.2% annualized return from 1957-2002, versus an 11.1% return for the broader S&P 500 Index over that time.
It is not hard to see why dividend growth stocks outperform non-dividend payers. During bear markets, in which equity markets decline, dividend yields serve as valuable downside protection to limit losses. Then, when markets recover, dividend yields significantly add to an investor’s total return.
For income investors who are interested in dividend growth stocks, these funds are worthy of additional consideration.
Top Dividend Growth Mutual Funds
With the Federal Reserve so far remaining constant with zero-interest rate policy, asset prices have been lifted, which has reduced dividend yield across the equity market. The S&P 500 Index yields just 2%. As a result, investors looking to produce dividend income should view dividend growth stocks favorably. Let’s look at stocks that should raise their dividends at high rates over time, which will result in a stronger yield on cost in future years.
Vanguard Dividend Growth
VDIGX has returned 3% year-to-date. It invests primarily in large-cap dividend growth stocks. Among its top 10 holdings are UPS (UPS), Microsoft (MSFT) and United Healthcare (UNH). This fund yields 1.8%, which is below the S&P 500 average yield—but the fund should make up for that over time with considerable dividend growth. In addition, the fund is attractive because it has a low expense ratio of just 0.3% annually, as well as a five-star fund rating from Morningstar.
Fidelity Dividend Growth Fund
FDGFX has gained 1% year-to-date. Like the Vanguard fund, the Fidelity fund also invests the majority of its assets in large-cap dividend growth stocks. Its dividend yield stands at 1.3%, and the fund carries a 0.6% expense ratio. The Fidelity Dividend Growth Fund’s top 10 holdings include Apple (AAPL), Johnson & Johnson (JNJ) and Exxon Mobil (XOM). This fund has performed very well in the past few years. Its three-year annualized returns are 14%.
T. Rowe Price Dividend Growth
PRDGX has returned 3.6% so far this year, making it the best-performing mutual fund of this group. It also has a solid 1.6% dividend yield. The fund has a 0.6% annual expense ratio. Over the past five years, the T. Rowe Price Dividend Growth Fund has returned 14% average annual returns. Some of the fund’s top holdings include Danaher Corp (DHR), Pfizer (PFE) and General Electric (GE). This fund receives a respectable four-star rating from Morningstar.
The Bottom Line
Dividend stocks have been shown to outperform non-dividend stocks over time. Investors can take advantage of this trend by investing in high dividend growth mutual funds. The three mutual funds listed above offer decent dividend yields, high dividend growth potential and modest annual fees. Their investments are primarily in large-cap dividend stocks, with secure dividend yields backed by strong cash flows and excellent balance sheets. This could make them attractive investment options for investors who are looking to generate growing income over the next several years.