U.S. stocks posted good gains in the second quarter of 2014 despite an uncertain geopolitical and economic environment. Downside concerns included violence in Crimea and Ukraine, slowing growth in China, sectarian strife in Iraq, and disappointing first-quarter U.S. economic data. Investor sentiment overcame these concerns amid signs of recovery from the first quarter's economic contraction, while improved corporate merger and acquisition activity was also supportive. Federal Reserve monetary policy remained broadly accommodative despite continued tapering of its asset purchase program. According to S&P Dow Jones indices, net dividend increases lagged the prior year's quarter but were still a robust $12.6 billion. The average yield for dividend-paying stocks fell to 2.44% from 2.48% at the end of the first quarter.
The Dividend Growth Fund returned 3.94% in the quarter compared with 5.23% for the S&P 500 Index and 4.51% for the Lipper Large-Cap Core Funds Index. For the 12 months ended June 30, 2014, the fund returned 21.12% versus 24.61% for the S&P 500 Index and 23.38% for the Lipper Large-Cap Core Funds Index. The fund's average annual total returns were 21.12%, 17.13%, and 8.14% for the 1-, 5-, and 10-year periods, respectively, as of June 30, 2014. The fund's expense ratio was 0.66% as of its fiscal year ended December 31, 2013.
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Energy and information technology were among our top-performing sectors for the quarter, as were smaller positions in utilities and materials. Consumer staples, health care, and financials posted modest gains but lagged the broader market, while consumer discretionary declined slightly. The recent surge in energy stocks is due largely to concerns about supply disruptions caused by renewed violence in the Middle East. Over the long term, however, we expect increasing supply from North America to drive energy prices down, and we remain underweight to the sector. Consumer discretionary is our largest overweight, emphasizing companies that can provide solid growth even in a tepid recovery and additional upside if growth is stronger than expected. Media companies are a current area of focus.
The U.S. economy should continue to grow modestly in 2014, supported by a broadly accommodative monetary policy, despite Fed tapering, solid corporate fundamentals, improvements in the housing and labor markets, and decent consumer spending, we remain reasonably optimistic about the environment for equities. Given the disparity between recent returns and the relatively modest pace of earnings growth for many companies, however, equity valuations have become less attractive, and companies will need to deliver solid earnings and revenue growth to justify further gains. In-depth research and careful stock selection will be essential as fundamental factors like earnings growth and cash flow become more important in assessing the health of companies and the economy.