Large-cap U.S. stocks fell sharply in the third quarter amid worries about a China-led global economic slowdown and concerns about the timing, pace, and wider impact of looming Federal Reserve interest rate hikes. Energy and materials stocks, many of which are closely tied to slowing Chinese demand and a stronger U.S. dollar, were particularly weak. The decline dragged 12-month returns into negative territory despite signs of modest U.S. economic growth, including improvements in business and consumer spending, employment, and wages. Corporate balance sheets and cash flows remain generally healthy outside energy-related sectors. According to S&P Dow Jones Indices, net dividend increases rose $10 billion during the quarter, which is down 19% from the same period last year, and the weighted average yield of all paying issues was 2.83% versus 2.59% at the end of the second quarter.
The Dividend Growth Fund returned −5.81% in the quarter compared with −6.44% for the S&P 500 Index and −7.15% for the Lipper Large-Cap Core Funds Index. For the 12 months ended September 30, 2015, the fund returned 1.57% versus −0.61% for the S&P 500 Index and −2.55% for the Lipper Large-Cap Core Funds Index. The fund's average annual total returns were 1.57%, 13.00%, and 7.28% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2015. The fund's expense ratio was 0.65% as of its fiscal year ended December 31, 2014.
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A small position in the utilities sector generated moderate gains for the portfolio as investors sought safe-haven assets and income in a risk-averse environment. A larger position in consumer staples eked out a slim gain, led by food producers and food and staples retailers. Energy and materials stocks recorded steep losses amid concerns about global overcapacity and expectations for weaker global demand, especially from China. The outlook for rising U.S. interest rates and a stronger U.S. dollar are also weighing on commodities prices, as most commodities are priced in U.S. dollars and become more expensive to non-U.S. consumers as the dollar gains in value. Financials remains our largest sector allocation, with a focus on capital markets firms, banks, and insurance. Health care is the most attractive of the traditionally defensive industries, and we are looking for companies that can generate consistent growth regardless of economic or public policy considerations.
The U.S. economy should continue to grow at a slow but steady pace, supported by moderate job growth, better consumer spending, and low inflation. We will be watching the next earnings season, particularly in the industrials and business services sector that has been hit hard by weak global end markets and a stronger U.S. dollar. We expect to see a continuation of relatively subdued market gains coupled with higher volatility, with China's economic slowdown, falling energy and commodity prices, and the potential for rising U.S. interest rates among the larger near-term risks. We would not be surprised to see a market pullback following years of strong gains and would use that as an opportunity to add high-quality stocks at attractive valuations.