U.S. equities enjoyed strong gains in the third quarter of 2013 as continued monetary stimulus and signs of a global economic rebound outweighed concerns about slowing corporate profit growth. The Federal Reserve bolstered investor sentiment early in the quarter by quelling worries that it would soon increase short-term interest rates. Markets peaked in mid-September after the Fed unexpectedly delayed tapering its asset purchase program. Stocks also received a boost from signs that the eurozone recession had ended and that emerging market economies seemed to be regaining traction. Markets fell in the period's closing weeks, however, due to concerns about the underlying strength of the U.S. recovery and the potential impact from a looming budget stalemate in Washington. According to S&P Dow Jones indices, net dividends increased $11.9 billion in the quarter compared with an $8.8 billion increase in the same period last year. The average yield for dividend-paying stocks was 2.60% at the end of the third quarter versus 2.65% for the prior quarter.
The Dividend Growth Fund returned 5.05% in the quarter compared with 5.24% for the S&P 500 Index and 5.70% for the Lipper Large-Cap Core Funds Index. For the 12 months ended September 30, 2013, the fund returned 19.98% versus 19.34% for the S&P 500 Index and 21.34% for the Lipper Large-Cap Core Funds Index. The fund's average annual total returns were 19.98%, 9.97%, and 8.07% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2013. The fund's expense ratio was 0.67% as of its fiscal year ended December 31, 2012.
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Industrials and business services, information technology, and materials were our top-performing sectors for the period. Telecommunication services and consumer staples were among our weakest sectors but still managed modest gains. A small position in utilities was negative for the period. Financials remains our largest sector weight, and we added to our allocation during the quarter due to the ongoing U.S. economic recovery, housing market gains, and rising interest rates. Information technology is one of the larger sector allocations in the portfolio, but we are significantly underweight versus the benchmark, due in part to the relatively small number of dividend-paying stocks. Our holdings are concentrated in IT services companies that will benefit from the increasing demand for business technology solutions. We also like semiconductors and semiconductor equipment as the growing adoption of mobile computing is driving the need for semiconductor technology and innovation.
We expect modest U.S. economic growth over the next several quarters, supported by the continued recovery of the domestic housing market, moderate employment growth, and muted inflation. Healthy balance sheets and good cash flow offer corporations some flexibility in capital deployment, which could boost shareholder-friendly actions, including share repurchases and dividends. Although the Fed will likely begin tapering its asset purchase program in the coming months, we expect overall monetary policy to remain accommodative for some time. Partisan budget battles in Washington could weigh on growth. Barring a prolonged government shutdown, and particularly, a failure to reach an agreement on the debt ceiling, fiscal headwinds should fade going into year-end. Regardless, our investment approach remains the same: We look to buy and hold high-quality growth companies with strong earnings and cash flows that offer a combination of capital appreciation and income growth.