It's widely assumed that entrepreneurs are more interested in aggressive rather than conservative investments. It goes with the temperament, presumably.
People who are taking sizable risks with their own businesses, however, may do better concentrating on a middle-of-the-road mutual fund. It would seem imprudent to have a large proportion of high-risk assets in a business and another chunk at high risk in an investment portfolio.
The T. Rowe Price Dividend Growth Fund is one good-quality conservative equity fund. Its journey has been pretty smooth, according to Morningstar. Its risk score is one of the lowest in its category, but reduced risk hasn't slowed returns--the mixture of "moderate risk and potent returns" has given the fund Morningstar's highest rating of five stars. It's in the category known as large-blend funds, which typically invest in large companies that their managers think have good growth potential and are also reasonably priced. Among the 129 funds in this category, our profiled fund appears in the top 10 for both the highest returns and the lowest risk over the latest five-year period.
William J. Stromberg, the fund's manager, has achieved these results by focusing on large companies that have shown a high degree of consistency in raising their dividends. "These companies have both the wherewithal and the will to reward shareholders," Stromberg says. This suggests they are either in a profitable, expanding industry or they manage their operations exceptionally well in a difficult industry. Even better are companies whose dividend payments are growing--and growing quickly.
By definition, these are unusual companies. The fund generally has only about 300 to 400 businesses to choose from that meet its criteria. The fund typically holds close to 100 of these, in a wide range of industries, to spread the risks through a classic diversification strategy. The portfolio also includes companies that are smaller than the giants but still strong players in their industries.
The results of the dividend policy show up in the fund's current yield--2.2 percent--compared with 1.85 percent for the Standard & Poor's (S&P) 500 Index and an average of just 1 percent for the fund's peers. In recent years, the extraordinary stock market returns have diminished the value placed on income. Over the long haul, however, dividends have accounted for close to 40 percent of the returns of large companies. If market returns revert to their historical average of around 10 percent--and possibly lower for a year or two as prices take a breather--the steadily growing income stream produced by companies like those in the fund could become a key factor.
Historically, dividends from the large companies in the S&P 500 have increased faster than the inflation rate. Theoretically, too, dividends should act as a cushion to slow price declines if the market drops.
Having chosen what he thinks are good companies at good prices, Stromberg holds on to his average purchases twice as long. The fund's annual turnover rate of nearly 50 percent in most years is roughly half that of the average equity fund.
To avoid fluctuations even more, Stromberg has ventured into less volatile securities, at times holding close to 20 percent of assets in bonds, convertibles and cash--so the fund has had its best relative performance in down markets.
Though no fund promises future returns, this one is the kind that, while keeping returns up, has also kept the blood pressure down.