U.S. equities posted strong gains in the first quarter, with several indexes hitting multiyear highs. Stocks advanced despite domestic fiscal uncertainty and eurozone instability as the U.S. economic recovery continued to grind ahead, buoyed by improvements in the housing and employment markets. The Federal Reserve's accommodative monetary policy and heightened merger and acquisition activity provided further support. The positive sentiment was tempered by concerns about higher taxes and budget sequester in the U.S., while an Italian election stalemate and a controversial bank deposit tax in Cyprus highlighted the eurozone's ongoing challenges. According to S&P Dow Jones, dividends continued to grow in the quarter, with net increases reaching $14.5 billion, excluding special dividend payments. The average yield for paying dividend-paying stocks was 2.61% at the end of the first quarter versus 2.80% at the end of 2013, with the decrease largely resulting from recent stock price gains.
The Dividend Growth Fund returned 10.48% in the quarter compared with 10.61% for the S&P 500 Index and 10.54% for the Lipper Large-Cap Core Funds Index. For the 12 months ended March 31, 2013, the fund returned 15.19% versus 13.96% for the S&P 500 Index and 14.00% for the Lipper Large-Cap Core Funds Index. The fund's average annual total returns were 15.19%, 6.31%, and 9.02% for the 1-, 5-, and 10-year periods, respectively, as of March 31, 2013. The fund's expense ratio was 0.68% as of its fiscal year ended December 31, 2011.
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Benchmark Definitions
We added to our position in the industrials and business services sector, which accounts for the portfolio's largest overweight versus its benchmark. We favor businesses with diversified operations, high gross margins, attractive valuations, and durable long-term growth prospects that should thrive even after the cyclical upturn fades. We believe health care is the most attractive of the traditionally defensive sectors. We seek stocks that can generate strong and consistent growth regardless of government reform efforts or the overall economy and can capitalize from a rebound in utilization as the economy recovers. We also favor firms that offer innovative, solutions-driven health care or unique therapeutic benefits and believe opportunities exist for companies that can provide products or services that reduce health care costs.
We continue to position the portfolio for modest economic growth in 2013, supported by accommodative monetary policy and recent improvements in the housing and employment markets. Investors' preference for established, dividend-paying companies benefited the strategy during the quarter, and the environment for equities still appears generally favorable. Corporate balance sheets are in outstanding condition, and recent tax hikes on capital gains and dividend income were not as significant as some had anticipated. Stock valuations remain reasonable relative to fixed income and cash alternatives. Regardless of prevailing tax policies or the economic environment, 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 for our clients.
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