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Becareful When Picking Mutual Fund Based on its Name

by My Journey to Millions

I am being forced to change my online broker due to some ridiculous new regulations within my company and in researching new online brokers I came across a ridiculous named Mutual Fund.  As you may know I am pretty much obsessed with creating a dividend based portfolio and so in doing my research to find a new broker I have been specifically looking for their free ETF or Mutual Fund Dividend option to use as a supplement to my dividend based portfolio appropriately named, The Perpetual Income Machine.  It was in doing that research that I came across a Mutual Fund whose name had very little to do with the holdings therein.

You Need to Look at More than the Name When Researching Mutual Funds

I came across a commission free way to invest in Fidelity Dividend Growth (FDGFX) whose objective is to,

The investment seeks capital appreciation. The fund invests at least 80% of assets in equity securities and normally invests primarily in common stocks. It invests primarily in companies that pay dividends or that Fidelity Management & Research Company believes have the potential to pay dividends in the future. The fund invests in domestic and foreign issuers and in either “growth” stocks or “value” stocks or both. It uses fundamental analysis of factors such as each issuer’s financial condition and industry position, as well as market and economic conditions to select investments.

I understand that, like any fund, it wants to invest in assets that are going to grow or are under valued but it does have dividend its name so I looked at the top 10 holdings:

Apple, Inc. (AAPL) 2.66%
Wells Fargo Company (WFC) 1.70%
JP Morgan Chase & Co (JPM) 1.65%
Citigroup, Inc. (C) 1.53%
General Electric Company (GE) 1.35%
Coca-Cola Company (KO) 1.26%
Oracle Corporation (ORCL) 0.93%
Hewlett-Packard Company (HPQ) 0.91%
Philip Morris International, Inc. (PM) 0.90%
Cisco Systems, Inc. (CSCO) 0.83%

Apple? CitiGroup hasn’t provided a dividend in about 2 years? Cisco (Granted they have given one dividend in 5 years lol)? HPQ’s yield is about .2% – not 2% but .2%? Caveat Emptor, huh?

Kiplinger’s actually wrote about this problem about a year specifically mentioning this fund,

… of the 115 stocks held recently by T. Rowe Price Dividend Growth (symbol PRDGX), 98% pay a dividend. All 49 of the stocks in the portfolio of Vanguard Dividend Growth (VDIGX)…As the names of these funds indicate, the managers look for companies that pay dividends now and are likely to raise them in the future.

Now, consider Fidelity Dividend Growth (FDGFX). Seven of the fund’s 25 biggest holdings stiff shareholders. And at last report, 62% of the fund’s $7.8 billion in assets were in securities that pay a dividend or interest (the fund owns a few bonds). Clearly, this is a different sort of rising-dividend fund.

While I have run Free MorningStar reports on each of my mutual funds within my 401(k), I have never bothered to look at their top 10 holdings like I did here.

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Kevin 04/15/2011 - 10:02 am

That’s very interesting. I’ll have to be more careful when I’m looking at funds from now on.

Evan 04/17/2011 - 11:03 pm

You do mostly individual stocks though right?

Kevin 04/17/2011 - 11:17 pm

Yeah, all stocks and ETFs, except for my 401k and HSA. I need to take a closer look at my 401k funds and see what’s going on there.

krantcents 04/15/2011 - 11:12 am

Buyer beware! That is why they issue a prospectus. Actually reading the material reveals a lot of things about a fund. My last step is comparing so called similar funds for their past performance.

Sunil 04/16/2011 - 2:56 pm

right on. i too read the prospectus prior to investing, and then a relative comparison with similar funds further reinforces the decision

Evan 04/17/2011 - 11:05 pm

But the prospectus wouldn’t tell you what the fund is holding years down the line.

It would just have that same tired goal.

MC 04/16/2011 - 11:26 am

Good catch there! Their highest holding doesn’t even pay dividends! I understand if AAPL had a smaller allocation, but this being the top holding is almost deceptive.

Evan 04/17/2011 - 11:06 pm

Right?! That’s what shocked me. Needless to say I won’t be investing in this option.

Ravi Gupta 04/17/2011 - 3:52 am

Some great advice! That’s something I’ve never even considered. I wonder why this is the case with dividend funds. I think I need to do more research into some ETFs I’m looking to buy into.

-Ravi Gupta

Evan 04/17/2011 - 11:07 pm

I have no idea if it is the same with other ETFs, but if I had to guess it is (other than index ETFs obviously)

optionsdude 04/17/2011 - 8:49 am

Great catch. There are many mutual funds that drift away from their original intention as managers try to follow the market and chase performance. That was true during the tech bubble. Not surprising that this fund just had to own AAPL which is the stock du jour.

Evan 04/17/2011 - 11:09 pm

That is basically what the Kiplinger’s article said – The manager is paid based on AUM (assets under management) so if they can eek out a few extra points…

youngandthrifty 04/21/2011 - 12:25 am

Wow, that’s scary! Apple?? Dividend growth?

Maybe they just thought ‘growth’ and not dividend.

It definitely pays to read the fine print and look up what the fund is actually invested in. Definitely agree with optionsdude- the fund managers desperately trying to catch or beat the market, I guess.


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