Dividend stocks are outperforming amid the equity market’s volatility, as investors are thirsty for the regular income that these stocks can provide.
While the S&P 500 index has dropped 13% so far this year, the S&P 500 Dividend Aristocrats index has slipped only 6%. The latter index includes stocks that have raised their dividends for at least 25 straight years.
If you’re thinking of investing in the sector, here are two of Morningstar’s top-rated dividend-stock mutual funds.
Vanguard Dividend Growth Fund VDIGX
The fund focuses on high-quality companies that have both the ability and the commitment to grow their dividends over time. Morningstar gives the fund its top rating of gold.
Fund manager Donald Kilbride’s strategy in building its 40- to 50-stock portfolio “blends disciplined, benchmark-agnostic focus on firms likely to continue increasing their dividends at a double-digit rate with a willingness to learn and adapt,” Morningstar analyst Alec Lucas wrote in a commentary.
In the technology sector, Kilbride steers away from “capital-intensive businesses that rely on one or two products with short life cycles,” Lucas said. “But he now appreciates how the ecosystem of a company like Apple (AAPL) can fuel long-term dividend growth and how Texas Instruments’ (TXN) roughly 80,000 products and embedded competitive advantages can do the same.”
Kilbride purchased Texas Instruments shares in the third quarter and is “open to buying Apple for the first time in his career should its price become attractive,” Lucas said.
The fund has registered a total return of negative 3.7% year to date, but has generated a positive return of 8.9% for the past year and an annualized 14.5% for the past five years, according to Morningstar.
T. Rowe Price Equity Income Fund PRFDX
The fund seeks a high level of dividend income and long-term capital growth. Morningstar gives it the firm’s second highest rating of silver. The fund has a “strong analyst team and well-executed process,” Morningstar analyst Adam Sabban wrote in a commentary.
“While dividend-paying stocks feature prominently in this strategy, income is but one of a few considerations. Manager John Linehan won’t reach for yields while compromising on fundamentals, though he’ll sometimes lower his quality criteria for a stock trading at a large perceived discount.”
About 95% of the fund’s holdings generally pay a dividend. The portfolio is built around the Russell 1000 Value index, but “leaves enough room for differentiation through moderate sector over- or under-weightings and single-stock bets,” Sabban said.
“That structure has suited the strategy well, as it surpassed the returns of both its average rival and benchmark over Linehan’s tenure, which began in November 2015.”
Linehan “isn’t afraid to hold onto companies that cut or suspend their dividend,” Sabban said. For example, “a number of otherwise healthy businesses, such as Disney (DIS), suspended their dividends in 2020 due to … the pandemic. Linehan held onto their shares, which proved to be the right call.”
The fund posted a total return of 0.79% year to date, a 6.4% return for the past year, and a 10.6% annualized return for the past five years, according to Morningstar.
The author of this story owns shares of Vanguard Dividend Appreciation ETF.
