Large-cap U.S. stocks posted modest gains in the third quarter of 2014 despite ongoing turmoil in the Middle East and Ukraine and the Fed's tapering of its asset purchases. Investors were buoyed as the U.S. economy appeared to improve. Labor market data were strong, the manufacturing sector remained robust, and a better job market and rising consumer spending appeared to drive growth in the service sector. Investors were further encouraged that corporations had been able to leverage moderate economic growth into faster profit growth. According to S&P Dow Jones Indices, net dividend increases rose $12.3 billion during the third quarter. The average yield for dividend- paying stocks rose to 2.50% from 2.44% at the end of the second quarter.
The Dividend Growth Fund returned 0.08% in the quarter compared with 1.13% for the S&P 500 Index and 0.29% for the Lipper Large-Cap Core Funds Index. For the 12 months ended September 30, 2014, the fund returned 15.40% versus 19.73% for the S&P 500 Index and 17.07% for the Lipper Large-Cap Core Funds Index. The fund's average annual total returns were 15.40%, 14.36%, and 8.23% for the 1-, 5-, and 10-year periods, respectively, as of September 30, 2014. The fund's expense ratio was 0.66% as of its fiscal year ended December 31, 2013.
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Materials, consumer discretionary, and information technology were our top-performing sectors for the quarter. Health care and financials eked out slim gains, while our industrials and business services and energy holdings declined. Financials remains our largest sector allocation. Although this economically sensitive sector has rebounded from the lows of the financial crisis, valuations in certain areas are still reasonable. We also believe this sector in particular will benefit from an improving U.S. economy and continued firming in the housing market. Rising rates would also provide a material boost. Industrials are our largest overweight versus the benchmark, with a focus on high gross margin businesses that should thrive through a full market and economic cycle.
Overall, we remain reasonably optimistic about the environment for equities. The U.S. economy should continue to grow modestly, supported by broadly accommodative monetary policy, solid corporate fundamentals, and decent consumer spending. However, equity valuations have become full and appear stretched in some areas, making compelling investment opportunities harder to find. We are mindful of potential risks in the coming months, including midterm elections in November, concerns about the pace and timing of interest rate hikes by the Fed, and heightened geopolitical uncertainty in many areas of the world. We would not be surprised to see a short-term market pullback and would use it as an opportunity to add to our highest-conviction ideas at more attractive valuations.