Annual Report
Dividend Growth Fund
December 31, 1996
T. Rowe Price
Report Highlights
o The U.S. stock market rose impressively in 1996, achieving strong
back-to-back annual gains.
o The Dividend Growth Fund returned 15.72% and 25.36% for the 6- and
12-month periods, respectively, outstripping both the S&P 500 and the
Lipper Growth & Income Funds Average for both periods.
o The fund's best performers since June included REITs, several growth
companies, and a number of holdings involved in mergers or takeovers.
o Positions were established in several companies that offered good value
and should be able to grow their earnings and dividends, including
Tupperware and McCormick.
o We would not be surprised by a market correction in 1997, but will
adhere to our long-term perspective and take advantage of any buying
opportunities.
Fellow Shareholders
U.S. stocks closed out 1996 with impressive returns. Powered by solid
corporate earnings growth, moderate inflation, strong investor demand, and
status quo election results, the unmanaged Standard & Poor's 500 Stock Index
advanced 11.7% in the second half, bringing the year's total return to 23.0%.
Even more notable was the Index's 1995 and 1996 combined gain of 69%, its
fifth-best two-year performance this century.
Performance Comparison
_____________________________________________________________________________
Periods Ended 12/31/96 6 Months 12 Months
Dividend Growth Fund 15.72% 25.36%
S&P 500 11.68 22.96
Lipper Growth & Income
Funds Average 10.57 20.78
The Dividend Growth Fund more than kept pace in 1996, rising 15.7% in the
second half and 25.4% for the full year, outpacing both the Lipper Growth &
Income Funds Average and the S&P 500.
Year-End Distributions
Your Board of Directors declared a fourth quarter dividend of $0.11 per share,
a short-term capital gain of $0.06 per share, and a long-term capital gain of
$0.27 per share. All were paid on December 30 to shareholders of record on
December 26. You should already have received a check or statement reflecting
these distributions as well as your Form 1099-DIV reporting them for tax
purposes.
Long-Term Perspective
We launched the Dividend Growth Fund four years ago because we believed that
buying stocks of companies with consistent earnings and dividend growth would
lead to attractive total returns and rising dividends for our shareholders. So
far, our results have been reasonably good. The fund's cumulative 101%
four-year gain is ahead of both the Lipper Growth & Income Average (76%) and
the S&P 500 (89%). Also important, fund dividends have grown each year.
Investors who purchased shares at the $10 inception price and reinvested
dividends and capital gains in additional shares have received rising
dividends over the ensuing four years; their current dividend yield on their
original investment had risen to 4.27% by year-end. We cannot guarantee that
the fund's dividends will increase every year, but over the long term they
should continue to rise as our portfolio companies grow and increase their
dividend payments.
Chart 1 - Dividend Growth Fund Yield
Performance Review
Strong second-half performance resulted from sizable rebounds in steady growth
companies, several takeovers, and a major rally in real estate investment
trusts (REITs). Some of our best performers were long-time holdings
AlliedSignal, GE, Hubbell, Pfizer, Norwest, and UNUM. Although operating in
different businesses, these companies distinguished themselves by posting
consistent and above-average earnings and dividend growth that was rewarded in
the marketplace. They remain significant holdings, and we see more growth
ahead.
Eight of the fund's holdings rose as a result of takeover or merger proposals.
We view this as confirmation that we are finding companies whose value is not
yet fully recognized in the public markets. AMTROL, Integra Financial, South
West Property Trust, Conrail, Duracell International, DeBartolo Realty, and
Petrolite all rose after takeover or merger proposals surfaced. Although none
were top holdings, in aggregate they contributed significantly to overall
performance.
The rebound in REIT shares was a welcome change after lagging for the better
part of 18 months. We have written often about the solid cash flow and
dividend growth many REITs have been experiencing, and their valuations
finally became too cheap for investors to pass up. Many were top performers in
the second half including Starwood Lodging, Security Capital Industrial Trust,
Chelsea GCA, Storage USA (sold before year-end), and Storage Trust Realty. We
see continued growth at most of our REITs, but since the valuations are no
longer as compelling, we trimmed holdings in several that met our near-term
price targets.
Chart 2 - Sector Diversification
Portfolio Changes
We work closely with other T. Rowe Price portfolio managers and research
analysts to find new investment ideas. Several recent purchases resulted from
this cooperative effort and look particularly interesting.
We bought a sizable position in Tupperware this summer after it was spun off
from Premark International. Famous in the U.S. and Europe for its
high-quality, resealable containers, the company is expanding rapidly in Latin
America and the Far East where there is vast untapped growth potential. A new,
highly motivated management team is implementing sound plans and using the
company's significant free cash flow for dividend increases and share
repurchases that benefit investors.
McCormick, "The Spice Company" as it is known to many people, has a
well-earned reputation for quality and a long track record of profitable
growth. Over the last five years, though, it has struggled to defend its
market share against insurgent, price-cutting competitors. This battle hurt
earnings for an extended period, and we bought the stock 30% below its 1992
highs. Now the battle appears to be ending, and we expect McCormick to begin a
period of consistent growth.
Willis-Corroon is a U.K.-based international insurance brokerage company in
the midst of a turnaround. Its stock price fell by two-thirds over the last
five years as insurance prices around the world eroded and earnings declined.
A new chief executive has cut costs and refocused the company on its most
profitable lines of business. We think earnings will recover significantly and
shareholders will benefit.
Summary and Outlook
Conditions in the equity market have been nearly ideal, and stocks have
advanced without a 10% correction for a record-setting six years. In the U.S.
we've had consistent but moderate growth in the economy with low inflation,
stable interest rates, rising productivity, and an improving budget deficit in
Washington. American corporations have dramatically improved their
competitiveness and are doing well in overseas markets that have increasingly
opened to our products. Perhaps most important, the world's major countries
have been at peace, fostering increased confidence in financial markets.
History teaches us to expect bumps along the way, and we would not be
surprised to see stocks correct at some point in 1997. Valuations of many
stocks have risen to lofty levels, leaving little room for error. But history
also teaches us to keep a long-term perspective and to take advantage of
buying opportunities. Our plan, as it has been since the fund's inception, is
to buy stocks in a diversified mix of individual companies with strong
competitive positions and superior earnings and dividend growth potential. To
reduce risk, we will buy on weakness and remain conscious of how much we get
for what we pay. This approach has worked well over the last four years, and
we think it will remain productive.
Thank you for your continuing support.
Respectfully submitted,
William J. Stromberg
President and Chairman of the Investment Advisory Committee
January 17, 1997
Sticking To Your Game Plan
Chart 3 - Time Reduces Volatility of Market Returns
In our report to you one year ago, we mentioned the possibility of a modest
decline in stock prices. In fact, from May to July 1996, the broad market (as
measured by the Standard & Poor's 500 Stock Index) fell around 7%. However,
the bull market resumed its charge to post a robust 23% gain for the year.
Some believe the market is poised for a significant downturn. We do not expect
a major drop in stock prices in 1997, although another modest pullback is
possible. On balance, we expect stocks to advance at a much slower pace.
How should you prepare for a potential market pullback? As always, our advice
is to diversify your investments and focus on the long term. If you've
implemented a sound investment strategy, stay the course. Stocks have
historically overcome periods of volatility to provide better returns than
most other investments. Market corrections can even have a silver lining
because they result in good buying opportunities.
Furthermore, the volatility of stock market returns has diminished
significantly over longer time frames. The chart shows the best and worst
annualized returns on stocks over various rolling time periods between 1950
and 1996. (For instance, there were 37 rolling 10-year periods: 1950-1960,
1951-1961, etc.) Investors who held stocks for only one year could have had
as much as a 52.6% gain, or as little as a 26.5% loss - a spread of 79
percentage points. However, investors who held stocks for 10-year periods or
longer always overcame interim volatility to post gains for the entire period.
In addition, a well-diversified portfolio can weather volatility better than a
more concentrated portfolio over the long term and particularly during market
corrections. For example, during last summer's correction, small-company
stocks fell nearly 16% while large-company issues dropped 7.3%. However, a
portfolio diversified among large U.S. companies (30% of assets), small U.S.
companies (15%), foreign companies (15%), intermediate-term Treasury bonds
(30%), and Treasury bills (10%) would have lost a smaller 5.2% of its value.1
Above all, remember that investing is a long-distance race, not a sprint.
1 Ned Davis Research.
T. Rowe Price Dividend Growth Fund
Portfolio Highlights
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/96
______________________________________________
Mobil 1.9%
Tomkins 1.7
Hubbell 1.6
ACE Limited 1.6
Fannie Mae 1.6
______________________________________________
British Petroleum 1.5
AlliedSignal 1.5
SBC Communications 1.3
Alco Standard 1.2
GE 1.2
______________________________________________
PartnerRe Holdings 1.2
ALLTEL 1.2
Mellon Bank 1.2
Turner Broadcasting Systems 1.2
Reader's Digest 1.2
______________________________________________
Tupperware 1.2
Mid Ocean Limited 1.1
Great Lakes Chemical 1.1
Repsol 1.0
Cleveland Electric 1.0
______________________________________________
Kimberly-Clark 1.0
Time Warner LYONS 1.0
Chelsea GCA 1.0
Rentokil Group 1.0
Vodafone 1.0
______________________________________________
Total 31.5%
T. Rowe Price Dividend Growth Fund
Portfolio Highlights
MAJOR PORTFOLIO CHANGES
Listed in descending order of size
6 Months Ended December 31, 1996
Ten Largest Purchases
_______________________________________
Time Warner LYONS *
Corporate Express Cv. Bond *
Genuine Parts *
Mid Ocean Limited *
DQE *
EXEL *
Mobil
Reader's Digest Class B
Gaylord Entertainment *
St. Paul Companies *
Ten Largest Sales
_______________________________________
W. R. Berkley **
Hubbell Class B
Bank United **
GTE **
Revco **
AMTROL **
Millipore **
Cincinnati Financial **
Telefonica del Peru ADR **
Patriot American Hospitality **
*Position added.
**Position eliminated.
T. Rowe Price Dividend Growth Fund
Performance Comparison
This chart shows the value of a hypothetical $10,000 investment in the fund
over the past 10 fiscal year periods or since inception (for funds lacking
10-year records). The result is compared with a broad-based average or index.
The index return does not reflect expenses, which have been deducted from the
fund's return.
Chart 4 - Dividend Growth Fund
Average Annual Compound Total Return
This table shows how the fund would have performed each year if its actual (or
cumulative) returns for the periods shown had been earned at a constant rate.
Since Inception
Periods Ended 12/31/96 1 Year 3 Years Inception Date
___________________________________________________________
Dividend Growth Fund 25.36% 19.05% 19.14% 12/30/92
Investment return and principal value represent past performance and will
vary. Shares may be worth more or less at redemption than at original
purchase.
T. Rowe Price Dividend Growth Fund
Financial Highlights
For a share outstanding throughout each period
Year 12/30/92
Ended to
12/31/96 12/31/95 12/31/94 12/31/93
NET ASSET VALUE
Beginning of period $13.81 $11.04 $11.48 $10.00
Investment activities
Net investment income 0.35 0.36** 0.35* 0.29*0.29*
Net realized and
unrealized gain (loss) 3.08 3.08 (0.11) 1.63
Total from
investment activities 3.43 3.44 0.24 1.92
Distributions
Net investment income (0.36) (0.36) (0.34) (0.29)
Net realized gain (0.51) (0.31) (0.34) (0.15)
Total distributions (0.87) (0.67) (0.68) (0.44)
NET ASSET VALUE
End of period $16.37 $13.81 $11.04 $11.48
_________________________________________
Ratios/Supplemental Data
Total return 25.36% 31.75%** 2.16%** 19.41%*
Ratio of expenses to
average net assets 1.10% 1.10%** 1.00%* 1.00%*
Ratio of net investment
income to average
net assets 2.53% 2.92%** 3.11%* 2.60%*
Portfolio turnover rate 43.1% 56.1% 71.4% 51.2%
Average commission
rate paid $0.0936 - - -
Net assets,
end of period
(in thousands) $209,498 $84,500 $53,597 $40,862
* Excludes expenses in excess of a 1.00% voluntary expense limitation in
effect through 12/31/94.
** Excludes expenses in excess of a 1.10% voluntary expense limitation in
effect through 12/31/96.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Dividend Growth Fund
December 31, 1996
Statement of Net Assets
T. Rowe Price Dividend Growth Fund
Shares/Par Value
In thousands
Common Stocks 80.0%
FINANCIAL 17.2%
Bank and Trust 4.2%
Firstar 15,000 $ 788
Marshall & Ilsley 25,000 869
Mellon Bank 35,000 2,485
National City 28,000 1,256
Northern Trust 34,000 1,235
Norwest 47,000 2,044
8,677
Insurance 8.4%
ACE Limited 56,000 3,367
EXEL 50,000 1,894
Harleysville Group 60,200 1,821
Mid Ocean Limited 45,000 2,362
PartnerRe Holdings 75,000 2,550
St. Paul Companies 30,000 1,759
UNUM 28,000 2,023
Willis-Corroon ADR 155,000 1,782
17,558
Financial Services 4.6%
American Express 20,000 1,130
Fannie Mae 90,000 3,353
H&R Block 55,000 1,595
Household International 4,000 369
Sallie Mae 18,000 1,676
Travelers Group 35,000 1,588
9,711
Total Financial 35,946
UTILITIES 6.0%
Telephone Services 3.3%
ALLTEL 81,000 2,542
BellSouth 41,000 1,655
SBC Communications 53,000 2,743
6,940
Electric Utilities 2.7%
DQE 67,000$ 1,943
Duke Power 20,000 925
GPU 40,000 1,345
NIPSCO 35,000 1,387
5,600
Total Utilities 12,540
CONSUMER NONDURABLES 16.9%
Cosmetics 0.6%
International Flavors
& Fragrances 29,000 1,305
1,305
Beverages 1.4%
Anheuser-Busch 35,000 1,400
PepsiCo 49,000 1,433
2,833
Food Processing 4.5%
General Mills 25,000 1,585
Heinz 27,000 965
McCormick 85,000 2,003
Nabisco Holdings (Class A) 30,000 1,166
Quaker Oats 24,300 927
Ralston Purina 14,000 1,027
Sara Lee 45,000 1,676
9,349
Hospital Supplies/Hospital
Management 0.9%
Abbott Laboratories 15,000 761
Arrow International 40,000 1,135
1,896
Pharmaceuticals 4.0%
American Home Products 23,000 1,348
Johnson & Johnson 20,000 995
Merck 11,000 872
Pfizer 18,000 1,492
Schering-Plough 15,000 971
SmithKline Beecham ADR 25,000 1,700
Warner-Lambert 14,000 1,050
8,428
Miscellaneous Consumer Products 5.5%
Colgate-Palmolive 5,000 461
Duracell International 20,000 1,398
Newell 65,000 2,047
Philip Morris 17,000 1,915
Procter & Gamble 16,000 1,720
Richfood Holdings 70,000 1,697
Sysco 35,000 1,142
Unilever N.V. ADR 7,000 1,227
11,607
Total Consumer Nondurables 35,418
CONSUMER SERVICES 6.1%
Specialty Merchandisers 1.2%
Tupperware 45,000 2,413
2,413
Entertainment and Leisure 2.3%
Carnival (Class A) 50,000 1,650
Disney 12,000 835
Reader's Digest (Class B) 67,000 2,429
4,914
Media and Communications 2.6%
Gannett 22,000 1,647
Gaylord Entertainment 75,000 1,716
Vodafone ADR 50,000 2,069
5,432
Total Consumer Services 12,759
CONSUMER CYCLICALS 8.3%
Automobiles and Related 1.0%
Genuine Parts 45,000 2,003
2,003
Building and Real Estate 6.1%
Arden Realty Group, REIT 50,000 1,388
Chelsea GCA, REIT 60,000 2,077
Franchise Finance, REIT 42,000 1,160
Reckson Associates Realty,
REIT 25,000 1,056
Security Capital Industrial
Trust, REIT 54,166 1,158
SECURITY CAPITAL PACIFIC
TRUST, REIT 65,000 1,487
Simon Property Group, REIT 20,000 620
South West Property Trust,
REIT 85,000 1,434
Starwood Lodging, REIT 30,000 1,654
Storage Trust Realty, REIT 20,000 540
United Dominion Realty
Trust, REIT 20,000 310
12,884
Miscellaneous Consumer Durables 1.2%
Corning 30,000 1,387
Masco 30,000 1,080
2,467
Total Consumer Cyclicals 17,354
TECHNOLOGY 1.8%
Electronic Systems 0.3%
Hewlett-Packard 12,000 603
603
Aerospace and Defense 1.5%
AlliedSignal 46,000 3,082
3,082
Total Technology 3,685
CAPITAL EQUIPMENT 6.8%
Electrical Equipment 5.0%
Emerson Electric 10,000 967
GE 26,000 2,571
Hubbell (Class A) 45,000 1,710
Hubbell (Class B) 40,000 1,730
Tomkins ADR 190,000 3,515
10,493
Machinery 1.8%
Cooper Industries 20,000 843
Danaher 25,000 1,166
Teleflex 35,000 1,824
3,833
Total Capital Equipment 14,326
BUSINESS SERVICES AND
TRANSPORTATION 5.7%
Computer Service and Software 1.6%
Analysts International 25,000 694
Automatic Data Processing 28,000 1,201
Reynolds & Reynolds 55,000 1,430
3,325
Distribution Services 1.2%
Alco Standard 50,000 2,581
2,581
Environmental 1.0%
Rentokil Group (GBP) 275,000 2,073
2,073
Miscellaneous Business Services 1.6%
Interpublic Group 20,000 950
RPM 55,000 935
Wallace Computer Services 42,000 1,449
3,334
Railroads 0.3%
Burlington Northern Santa Fe 8,000 691
691
Total Business Services and
Transportation 12,004
ENERGY 5.4%
Integrated Petroleum - Domestic 1.5%
British Petroleum ADR 22,000 3,110
3,110
Integrated Petroleum - International 3.9%
Mobil 33,000 4,035
Repsol ADR 57,000 2,173
Royal Dutch Petroleum ADR 12,000 2,049
8,257
Total Energy 11,367
PROCESS INDUSTRIES 4.0%
Specialty Chemicals 2.3%
Great Lakes Chemical 49,000 2,291
Nalco Chemical 20,000 722
Petrolite 37,400 1,758
4,771
Paper and Paper Products 1.7%
Consolidated Papers 30,000 1,474
Kimberly-Clark 22,000 2,095
3,569
Total Process Industries 8,340
Miscellaneous Common Stocks 1.8% 3,819
Total Common Stocks (Cost $133,728) 167,558
Preferred Stocks 1.2%
California Federal Bank,
10.625%, Series B 3,000 332
Cleveland Electric, $1.88
Adj., Series L 21,900 1,785
Cleveland Electric, 8.80%,
Series R 320 319
Total Preferred Stocks (Cost $2,152) 2,436
Convertible Preferred Stocks 0.1%
Security Capital Industrial
Trust, REIT, 7.00%, Series B 10,000 275
Total Convertible Preferred Stocks (Cost $226)275
Convertible Bonds 5.3%
ALZA, LYONS, Zero Coupon,
7/14/14 $3,000,000 1,241
Corporate Express (144a),
4.50%, 7/1/00 2,200,000 2,050
Liberty Property, 8.00%, 7/1/01 1,000,000 1,279
Time Warner, LYONS, Zero Coupon,
12/17/12 5,500,000 2,093
Turner Broadcasting Systems
(144a), LYONS Zero Coupon,
2/13/07 5,000,000 2,456
Miscellaneous Convertible Bonds 1,957
Total Convertible Bonds (Cost $10,585) 11,076
Corporate Bonds 0.9%
American Standard, Sr. Sub.
Deb., 9.875%, 6/1/01 250,000 265
AMTROL (144a), Sr. Sub. Notes,
10.625%, 12/31/06 500,000 513
Clark Materials (144a), Sr.
Notes, 10.75%, 11/15/06 250,000 260
El Paso Electric, 1st Mtg. Notes,
9.40%, 5/1/11 $300,000 318
Lear Seating, Sub. Notes, 8.25%,
2/1/02 120,000 121
Texas Bottling Group, Sr. Sub.
Notes, 9.00%, 11/15/03 500,000 506
Total Corporate Bonds
(Cost $1,922) 1,983
U.S. Government Mortgage-Backed
Securities 0.1%
Government National Mortgage Assn.
I, 10.00%, 4/15/18 100,567 110
II, 10.50%, 12/20/20 81,329 89
Total U.S. Government
Mortgage-Backed Securities
(Cost $201) 199
U.S. Government Obligations 1.7%
U.S. Treasury Notes
5.625%, 2/15/06 500,000 473
5.75%, 8/15/03 400,000 388
6.00%, 8/15/99 700,000 700
6.125%, 12/31/01 500,000 499
6.25%, 10/31/01 400,000 400
6.375%, 5/15/99 500,000 504
6.50%, 5/31 - 8/31/01 500,000 506
Total U.S. Government Obligations
(Cost $3,430) 3,470
Short-Term Investments 10.8%
Commercial Paper 10.3%
Asset Securitization Cooperative,
4(2), 5.30%, 2/6/97 3,000,000 2,984
Beta Finance, 4(2), 5.32%,
1/6/97 3,000,000 2,998
Caisse D Amortissement, 5.40%,
2/20/97 2,000,000 1,985
Investments in Commercial Paper
through a joint account
6.75 - 7.10%, 1/2/97 6,154,261 6,153
Kingdom of Sweden, 5.39%,
1/10/97 2,000,000 1,997
Korea Development Bank, 5.33%,
2/27/97 3,000,000 2,975
Merrill Lynch & Co., 5.34%,
1/13/97 2,564,000 2,560
21,652
Medium-Term Notes 0.5%
Morgan Stanley Group, VR,
5.656%, 1/31/97 $1,000,000 1,000
1,000
Total Short-Term Investments
(Cost $22,652) 22,652
Total Investments in Securities
100.1% of Net Assets (Cost $174,896) $209,649
Other Assets Less Liabilities (151)
NET ASSETS $209,498
________
Net Assets Consist of:
Accumulated net realized gain/
loss - net of distributions 3,203
Net unrealized gain (loss) 34,753
Paid-in-capital applicable to
12,799,686 shares of $0.0001 par
value capital stock outstanding;
1,000,000,000 shares authorized 171,542
NET ASSETS $209,498
________
NET ASSET VALUE PER SHARE $16.37
________
REIT Real Estate Investment Trust
VR Variable rate
4(2) Commercial paper sold within terms of a private placement memorandum,
exempt from registration under section 4.2 of the Securities Act of
1933, as amended, and may be sold only to dealers in that program or
other "accredited investors."
(144a) Security was purchased pursuant to Rule 144a under the Securities Act
of 1933 and may not be resold subject to that rule except to
qualified institutional buyers - total of such securities at year-end
amounts to 2.5% of net assets.
GBP British sterling
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Dividend Growth Fund
Statement of Operations
In thousands
Year
Ended
12/31/96
Investment Income
Income
Dividend $3,186
Interest 1,356
Total income 4,542
Expenses
Investment management 754
Shareholder servicing 300
Custody and accounting 112
Registration 72
Prospectus and shareholder reports 18
Legal and audit 14
Directors 8
Miscellaneous 15
Reimbursed to Manager 84
Total expenses 1,377
Net investment income 3,165
Realized and Unrealized Gain (Loss)
Net realized gain (loss) on
Securities 7,386
Foreign currency transactions (1)
Net realized gain (loss) 7,385
Change in net unrealized gain or
loss on securities 20,575
Net realized and unrealized gain (loss) 27,960
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $31,125
________
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Dividend Growth Fund
Statement of Changes in Net Assets
In thousands
Year
Ended
12/31/96 12/31/95
Increase (Decrease) in Net Assets
Operations
Net investment income $3,165 $1,961
Net realized gain (loss) 7,385 3,020
Change in net unrealized
gain or loss 20,575 13,654
Increase (decrease) in net
assets from operations 31,125 18,635
Distributions to shareholders
Net investment income (3,338) (1,982)
Net realized gain (5,269) (1,923)
Decrease in net assets from
distributions (8,607) (3,905)
Capital share transactions*
Shares sold 130,963 26,044
Distributions reinvested 7,902 3,566
Shares redeemed (36,688) (13,488)
Increase (decrease) in
net assets from capital
share transactions 102,177 16,122
Net equalization 303 51
Net Assets
Increase (decrease) during period124,998 30,903
Beginning of period 84,500 53,597
End of period $209,498 $84,500
______________________
*Share information
Shares sold 8,636 2,076
Distributions reinvested 504 270
Shares redeemed (2,460) (1,081)
Increase (decrease)
in shares outstanding 6,680 1,265
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Dividend Growth Fund
December 31, 1996
Notes to Financial Statements
Note 1 - Significant Accounting Policies
T. Rowe Price Dividend Growth Fund, Inc. (the fund) is registered under the
Investment Company Act of 1940 as a diversified, open-end management
investment company and commenced operations on December 30, 1992.
Valuation Equity securities listed or regularly traded on a securities
exchange are valued at the last quoted sales price at the time the valuations
are made. A security which is listed or traded on more than one exchange is
valued at the quotation on the exchange determined to be the primary market
for such security. Listed securities not traded on a particular day and
securities regularly traded in the over-the-counter market are valued at the
mean of the latest bid and asked prices. Other equity securities are valued at
a price within the limits of the latest bid and asked prices deemed by the
Board of Directors, or by persons delegated by the Board, best to reflect fair
value.
Debt securities are generally traded in the over-the-counter market and are
valued at a price deemed best to reflect fair value as quoted by dealers who
make markets in these securities or by an independent pricing service.
Short-term debt securities are valued at their amortized cost which, when
combined with accrued interest, approximates fair value.
For purposes of determining the fund's net asset value per share, the U.S.
dollar value of all assets and liabilities initially expressed in foreign
currencies is determined by using the mean of the bid and offer prices of such
currencies against U.S. dollars quoted by a major bank.
Assets and liabilities for which the above valuation procedures are
inappropriate or are deemed not to reflect fair value are stated at fair value
as determined in good faith by or under the supervision of the officers of the
fund, as authorized by the Board of Directors.
Currency Translation Assets and liabilities are translated into U.S. dollars
at the prevailing exchange rate at the end of the reporting period. Purchases
and sales of securities and income and expenses are translated into U.S.
dollars at the prevailing exchange rate on the dates of such transactions. The
effect of changes in foreign exchange rates on realized and unrealized
security gains and losses is reflected as a component of such gains and
losses.
Premiums and Discounts Premiums and discounts on debt securities, other than
mortgage-backed securities, are amortized for both financial reporting and tax
purposes. Premiums and discounts on mortgage-backed securities are recognized
upon principal repayment as gain or loss for financial reporting purposes and
as ordinary income for tax purposes.
Other Income and expenses are recorded on the accrual basis. Investment
transactions are accounted for on the trade date. Realized gains and losses
are reported on the identified cost basis. Dividend income and distributions
to shareholders are recorded by the fund on the ex-dividend date. Income and
capital gain distributions are determined in accordance with federal income
tax regulations and may differ from those determined in accordance with
generally accepted accounting principles. The fund follows the practice of
equalization under which undistributed net investment income per share is
unaffected by fund shares sold or redeemed.
Note 2 - Investment Transactions
Commercial Paper Joint Account The fund, and other affiliated funds, may
transfer uninvested cash into a commercial paper joint account, the daily
aggregate balance of which is invested in high-grade commercial paper. All
securities purchased by the joint account satisfy the fund's criteria as to
quality, yield, and liquidity.
Other Purchases and sales of portfolio securities, other than short-term
securities, aggregated $137,989,000 and $47,969,000, respectively, for the
year ended December 31, 1996.
Note 3 - Federal Income Taxes
No provision for federal income taxes is required since the fund intends to
continue to qualify as a regulated investment company and distribute all of
its taxable income.
In order for the fund's capital accounts and distributions to shareholders to
reflect the tax character of certain transactions, the following
reclassifications were made during the year ended December 31, 1996. The
results of operations and net assets were not affected by the
reclassifications.
______________________________________________________________________
Undistributed net investment income $(130,000)
Undistributed net realized gain (163,000)
Paid-in-capital 293,000
At December 31, 1996, the aggregate cost of investments for federal income tax
and financial reporting purposes was $174,896,000, and net unrealized gain
aggregated $34,753,000, of which $35,458,000 related to appreciated
investments and $705,000 to depreciated investments.
Note 4 - Related Party Transactions
The investment management agreement between the fund and T. Rowe Price
Associates, Inc. (the manager) provides for an annual investment management
fee, of which $133,000 was payable at December 31, 1996. The fee is computed
daily and paid monthly, and consists of an individual fund fee equal to 0.20%
of average daily net assets and a group fee. The group fee is based on the
combined assets of certain mutual funds sponsored by the manager or Rowe
Price-Fleming International, Inc. (the group). The group fee rate ranges from
0.48% for the first $1 billion of assets to 0.305% for assets in excess of $50
billion. At December 31, 1996, and for the year then ended, the effective
annual group fee rate was 0.33%. The fund pays a pro-rata share of the group
fee based on the ratio of its net assets to those of the group.
Under the terms of the investment management agreement, the manager is
required to bear any expenses through December 31, 1996, which would cause the
fund's ratio of expenses to average net assets to exceed 1.10%. Thereafter,
through December 31, 1998, the fund is required to reimburse the manager for
these expenses, provided that average net assets have grown or expenses have
declined sufficiently to allow reimbursement without causing the fund's ratio
of expenses to average net assets to exceed 1.10%. Pursuant to a previous
agreement, $174,000 of unaccrued 1993-1994 fees and expenses were repaid
during the year ended December 31, 1996. Additionally, $5,000 of unaccrued
management fees related to the current expense limitation are subject to
reimbursement through December 31, 1998.
In addition, the fund has entered into agreements with the manager and two
wholly owned subsidiaries of the manager, pursuant to which the fund receives
certain other services. The manager computes the daily share price and
maintains the financial records of the fund. T. Rowe Price Services, Inc., is
the fund's transfer and dividend disbursing agent and provides shareholder and
administrative services to the fund. T. Rowe Price Retirement Plan Services,
Inc., provides subaccounting and recordkeeping services for certain retirement
accounts invested in the fund. The fund incurred expenses pursuant to these
related party agreements totaling approximately $282,000 for the year ended
December 31, 1996, of which $29,000 was payable at period-end.
T. Rowe Price Dividend Growth Fund
Report of Independent Accountants
To the Board of Directors and Shareholders of
T. Rowe Price Dividend Growth Fund, Inc.
In our opinion, the accompanying statement of net assets and the related
statements of operations and of changes in net assets and the financial
highlights present fairly, in all material respects, the financial position of
T. Rowe Price Dividend Growth Fund, Inc. (the "Fund") at December 31, 1996,
and the results of its operations, the changes in its net assets and the
financial highlights for each of the fiscal periods presented, in conformity
with generally accepted accounting principles. These financial statements and
financial highlights (hereafter referred to as "financial statements") are the
responsibility of the Fund's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these financial statements in accordance with generally accepted
auditing standards which require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits, which included confirmation of securities at December 31, 1996 by
correspondence with custodians and, where appropriate, the application of
alternative auditing procedures for unsettled security transactions, provide a
reasonable basis for the opinion expressed above.
PRICE WATERHOUSE LLP
Baltimore, Maryland
January 20, 1997
T. Rowe Price Shareholder Services
Investment Services And Information
Knowledgeable Service Representatives
By Phone 1-800-225-5132 Available Monday through Friday from
8 a.m. to 10 p.m. ET and weekends from 8:30 a.m. to 5 p.m. ET.
In Person Available in T. Rowe Price Investor Centers.
Account Services
Checking Available on most fixed income funds.
Automatic Investing From your bank account or paycheck.
Automatic Withdrawal Scheduled, automatic redemptions.
Distribution Options Reinvest all, some, or none of your distributions.
Automated 24-Hour Services Including Tele*Access(registered trademark) and
T. Rowe Price OnLine.
Discount Brokerage*
Individual Investments Stocks, bonds, options, precious metals, and other
securities at a savings over regular commission rates.
Investment Information
Combined Statement Overview of your T. Rowe Price accounts.
Shareholder Reports Fund managers' reviews of their strategies and results.
T. Rowe Price Report Quarterly investment newsletter discussing markets and
financial strategies.
Performance Update Quarterly review of all T. Rowe Price fund results.
Insights Educational reports on investment strategies and financial markets.
Investment Guides Asset Mix Worksheet, College Planning Kit, Personal
Strategy Planner, Retirees Financial Guide, and Retirement Planning Kit.
*A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
For yield, price, last transaction,
current balance, or to conduct
transactions, 24 hours, 7 days
a week, call Tele*Access(registered trademark):
1-800-638-2587 toll free
For assistance
with your existing
fund account, call:
Shareholder Service Center
1-800-225-5132 toll free
625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
http://www.troweprice.com
T. Rowe Price Associates
100 East Pratt Street
Baltimore, Maryland 21202
This report is authorized for
distribution only to shareholders
and to others who have received
a copy of the prospectus of the
T. Rowe Price Dividend Growth Fund.
Investor Centers:
101 East Lombard St.
Baltimore, MD 21202
T. Rowe Price
Financial Center
10090 Red Run Blvd.
Owings Mills, MD 21117
Farragut Square
900 17th Street, N.W.
Washington, D.C. 20006
ARCO Tower
31st Floor
515 South Flower St.
Los Angeles, CA 90071
4200 West Cypress St.
10th Floor
Tampa, FL 33607
Invest With Confidence(registered trademark)
T. Rowe Price
T. Rowe Price Investment Services, Inc., Distributor.RPRTDGF 12/31/96
Chart 1 - Dividend Growth Fund Yield - A line chart "Dividend Growth Fund
Yield" showing the current yield from 12/31/93 to 12/31/96.
Chart 2 - Sector Diversification - Sector Diversification pie chart showing
Consumer 26%, Financial 17%, Business Services and Transportation 8%, Capital
Equipment 7%, Utilities 7%, REITs 7%, Other 17%, Reserves 11%.
Chart 3 - Time Reduces Volatility of Market Returns - An 8-bar chart showing
best and worst annualized total returns of stocks for various rolling time
periods between 1950 and 1996.
Chart 4 - Dividend Growth Fund - SEC Graph: a line chart showing the
cumulative growth of $10,000 invested in the Dividend Growth Fund from
inception compared with $10,000 invested in a broad-based index or average
over the same period.
