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Fidelity Dividend Growth Fund (FDGFX)

What is the fund’s Objective?
Fidelity Dividend Growth Fund’s stated objective is capital appreciation.  Despite the name of the fund, income is not a primary goal of the fund—in fact the prospectus specifically states that, “Although [the manager] uses income to evaluate the fund's investments, the fund does not invest for income.” 

Under normal conditions, the fund will invest at least 80% of assets in equity securities.  It may, at the manager’s discretion, invest in both foreign and domestic issues and own both value and growth-oriented investments. 

How does the fund meet its Objective?
To achieve the fund’s capital appreciation objective, management focuses on companies that pay dividends or that the manager believes have the potential to pay dividends in the future.  The manager “uses the potential to pay dividends as a way of evaluating companies as investment opportunities.”  Although this language is somewhat obtuse, it clearly provides wide latitude in what can be included in the portfolio—regardless of the “dividend” moniker attached to the fund. 

According to management, it believes that dividends are an indication of financial health.  Moreover, the act of increasing a dividend payment or the initiation of a dividend is believed to provide a signal that there is an elevated potential for capital growth.  Although there is some logic to this statement, the fact remains that dividends aren’t a necessary component of a holding even though the word is in the name of the fund.

The manager is style agnostic and has the option of investing in both growth and value companies.  That said, fundamental analysis is used in the search for appropriate investments, with a focus on factors, such as a company's financial condition, earnings outlook, strategy, management, and industry position.  Economic and market conditions are also considered when evaluating a company’s stock. 

Management notes that is uses a "relative value" approach, in that is focuses on companies that it believes are inexpensive relative to the market and to a companies’ own history.  Management is also looking for a catalyst that it believes could lead to higher earnings or a revaluation of the market price of the shares.

How has the fund performed?
Although 2009 was an excellent year for the fund, as it advanced some 50%, that followed an abysmal 2008 showing, a period in which the fund fell just over 40%.  Although the two years combined represent what some might consider an anomaly in market history, it highlights the fact that, despite the name including the word dividend, this is not a conservative fund.  In fact, with a beta, a measure of market sensitivity, of 1.24 and a standard deviation, a measure of share price volatility, of approximately 25 (both over the trailing three-year period ended February, 2010), shareholders can expect a moderately bumpy ride.

On the dividend front, the fund distributes dividend income and capital gains just two times a year.  However, since income is not a focus of the fund, there isn’t much reason for an income-oriented investor to give these shares a second look.  Moreover, the relatively low dividend payout doesn’t provide help with the sleepless nights that may accompany the level of volatility the fund displays.

That said, the fund’s longer-term performance, over the trailing five- and ten-year periods through the end of February, 2010, are both better than those of its benchmark, the S&P 500 Index.  This is no small feat and merits some praise.  Performance relative to Value Line’s Growth Objective group is similarly solid over the trailing 10-year period, and even better over the trailing 15 years.

How much does it cost to own the fund?
Fidelity Dividend Growth Fund is a no-load fund.  The minimum initial investment is $2,500, which is a reasonable level.  Fidelity will allow lower amounts, so long as there is an automatic investment plan in place. 

The fund’s expense ratio of 0.62%, which makes it comparatively cheap to own.  About half that total is for the management fee, the rest is for “other” things, such as reports and customer service.  Putting the expense ratio into dollars and cents, an investor with $10,000 in the fund would pay approximately $62 for the year.  The average growth fund in the Value Line database would cost about twice that.

What type of investor should consider the fund?
Clearly, Fidelity Dividend Growth Fund is not an appropriate choice for those seeking income, despite the inclusion of the word dividend in its name.  However, for investors who can handle an elevated level of volatility and believe dividends provide investment signals, this is a solid go-anywhere offering.  For the more aggressive, it might even act as a “core” fund.