Semiannual Report
Dividend
Growth
Fund
June 30, 1998
T. Rowe Price
Report Highlights
Dividend Growth Fund
o Buoyed by almost ideal conditions, U.S. stocks posted strong returns in the
first half of 1998 as represented by the nearly 18% return of the S&P 500
Stock Index.
o The market's advance was narrow, with a relatively small number of blue
chips providing the bulk of the gain.
o The fund rose nicely for the six-month period, but lagged the S&P 500 and
its peer group because of its dividend orientation.
o Our best performers included Rentokil Group, a U.K.-based international
service company, and pharmaceutical and financial holdings; cyclicals and
real estate-related stocks did poorly, reflecting market trends.
o We expect a choppier market environment ahead and would use any dips to try
to purchase good values for the fund.
Fellow Shareholders
U.S. stocks surged in the first half of 1998, buoyed by tame inflation, falling
interest rates, and favorable investor sentiment. The S&P 500 Stock Index posted
a spectacular 17.71% return with the bulk of its gains coming from its largest
stocks. High-growth companies with premium valuations were the best performers
while dividend-oriented sectors such as telephone services, electric utilities,
REITs (real estate investment trusts), and diversified energy companies showed
no net advance.
Such a large gain from the S&P 500 was particularly remarkable coming on top of
record-setting returns over the last three years. Most worrisome perhaps was a
significant slowing of corporate earnings growth as economic turmoil in several
Far Eastern countries spread across the globe and led to downward spending
patterns and pricing pressure in many industries.
Your investment in the Dividend Growth Fund rose 9.54% in the first half, behind
the S&P 500 Index and the Lipper average of comparable funds for reasons
discussed in our performance review section. Over the 12-month period, the fund
returned a healthy 24.31%, behind the S&P 500 Index but ahead of the Lipper peer
group average.
Performance Comparison
Periods Ended 6/30/98 6 Months 12 Months
- --------------------------------------------------------------------------------
Dividend Growth Fund 9.54% 24.31%
S&P 500 17.71 30.16
Lipper Growth & Income
Funds Average 12.11 22.86
Distributions
On June 25, your Board of Directors declared a second quarter income dividend of
$0.12 per share payable to shareholders of record on that date. You should
already have received your check or statement reflecting this distribution. The
fund's first quarter distributions included $0.11 of income per share, a
long-term capital gain of $0.08 per share, and a short-term gain of $0.05. All
of these will be reported on Form 1099-DIV mailed to you in January 1999.
Performance Review
Investors became increasingly selective during the first half of 1998. An
initial rebound in cyclical stocks aborted when it became clear that economic
disruptions originating in Asia were spreading and that earnings of cyclical
companies would be vulnerable. Investors then rotated into large blue chip
growth stocks where confidence in continued earnings growth was highest, and
these stocks accounted for much of the S&P 500 Index's returns.
The narrowness of the advance made it difficult for value and dividend-oriented
funds to keep pace. Dividend Growth, which often lags a rapidly rising market
and picks up ground in choppier environments, rose nicely but trailed the S&P
500. Three pharmaceutical holdings, Pfizer, American Home Products, and Abbott
Laboratories, were top performers that benefited from investors shifting into
blue chip stocks. Our best performer overall was Rentokil Group, an
international service company based in the U.K. whose earnings and dividends
have grown at least 20% in each of the last 11 years. Three of our favorite
long-term insurance holdings, ACE Limited, EXEL, and Mid Ocean Limited, also
performed well as investors came to appreciate the growing diversity and
sustainability of their earnings bases.
Cyclical stocks and REITs were the fund's worst performers. Reduced earnings
expectations at Wallace Computer Services and Hercules led to serious stock
price declines. Although the share prices of our REITs declined, their cash flow
and dividends continued to grow robustly. We expect above-average growth to
continue right through 1999 and believe the stocks will be strong performers in
the near future.
Portfolio Changes
We made large purchases of three REITs whose share prices had fallen
substantially from recent highs: Crescent Real Estate Equities, Manufactured
Home Communities, and Starwood Hotels & Resorts. They are well-managed,
financially strong leaders in their respective niches and we think they have
excellent near- and long-term growth prospects. The stocks had fallen to
attractive values because many investors had come to believe (and still believe)
that the real estate recovery that began in 1991 was peaking and headed for
another downturn. Our more constructive view was that most sectors within real
estate were quite healthy and likely to remain buoyant for some time, and we
opted to raise the fund's exposure to 10% of assets.
Sector Diversification
Pie Chart - Dividend Growth Fund
- --------------------------------------------------------------------------------
Consumer 22%
Financial 18
Business Services and Transportation 9
REITS 10
Energy 6
Utilities 6
Other 18
Reserves 11
We also made a significant investment in Rite Aid, the largest operator of
retail drugstores in the U.S. The drugstore business is a reasonably sound one
with decent returns on investment and low cyclicality. With the aid of several
key management additions, Rite Aid is generating outstanding returns from its
major store remodeling program and is transitioning from an average operator to
a strong one. We look for the stock to be revalued appropriately.
One of our more frustrating purchases was SLM Holding, formerly Sallie Mae,
which is the leading provider of student lending services in the U.S. The stock
had fallen to an attractive valuation after the Clinton administration announced
plans to reduce borrowing rates for student loans by taking some of the profit
away from the lenders (banks) and loan servicers (SLM Holding). Although we made
a reasonable profit on the purchase, we became more wary of owning a business
that the administration was determined to impair and decided to sell.
We also sold all of our TriMas and a portion of our Mid Ocean Limited after they
received premium merger proposals. In the case of Mid Ocean, we will accept EXEL
stock, another portfolio holding, as payment in the merger.
Summary and Outlook
We expect a choppier market environment ahead. Stock prices have risen much
faster than earnings and dividends over the last three years, especially during
1998. Valuations have reached levels that leave little room for disappointment,
and for the first time in several years corporate earnings growth is slowing
significantly for a broadening list of companies.
Frankly, we would welcome a correction as a chance to invest in some great
dividend-growth companies at more attractive prices. We will continue to pay as
much attention to downside risk as to upside potential.
Thank you for your continuing support.
Respectfully submitted,
William J. Stromberg
President and Chairman of the Investment Advisory Committee
July 21, 1998
T. Rowe Price Dividend Growth Fund
- --------------------------------------------------------------------------------
Portfolio Highlights
- --------------------------------------------------------------------------------
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
6/30/98
- --------------------------------------------------------------------
Mobil 1.8%
AlliedSignal 1.7
SBC Communications 1.6
Fannie Mae 1.5
EXEL 1.5
- --------------------------------------------------------------------
Security Capital Industrial Trust 1.5
British Petroleum 1.5
Philip Morris 1.5
Crescent Real Estate Equities 1.4
Rite Aid 1.3
- --------------------------------------------------------------------
ACE Limited 1.3
Reckson Associates Realty 1.2
Starwood Hotels & Resorts 1.2
BANC ONE 1.1
Omnicom 1.1
- --------------------------------------------------------------------
PartnerRe Holdings 1.1
ALLTEL 1.1
Rentokil Group 1.1
Bristol-Myers Squibb 1.1
Newell 1.1
- --------------------------------------------------------------------
American Home Products 1.1
Mellon Bank 1.0
INMC Mortgage Holdings 1.0
Johnson & Johnson 1.0
Masco 1.0
- --------------------------------------------------------------------
Total 31.8%
T. Rowe Price Dividend Growth Fund
- --------------------------------------------------------------------------------
Portfolio Highlights
- --------------------------------------------------------------------------------
MAJOR PORTFOLIO CHANGES
Listed in descending order of size
6 Months Ended 6/30/98
Ten Largest Purchases Ten Largest Sales
- --------------------------------------------------------------------------------
Crescent Real Estate Equities Time Warner LYONS**
Rite Aid* SLM Holding
SLM Holding* Mid Ocean Limited
Bristol-Myers Squibb* TriMas***
Manufactured Home Communities* Nordstrom**
Starwood Hotels & Resorts Nalco Chemical**
Associates First Capital* Cadbury Schweppes**
Equifax* Allergan**
Hasbro* Nabisco Holdings**
Raytheon* BellSouth**
* Position added
** Position eliminated
*** Acquired by another company
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.
SEC Chart - Dividend Growth Fund
- --------------------------------------------------------------------------------
S&P 500 Index Dividend Growth Fund
12/30/92 10,000 10,000
6/93 10,414 11,001
6/94 10,560 11,680
6/95 13,313 13,952
6/96 16,775 17,410
6/97 22,595 23,216
6/98 29,411 28,860
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 6/30/98 1 Year 3 Years 5 Years Inception Date
- --------------------------------------------------------------------------------
Dividend Growth Fund 24.31% 27.42% 21.27% 21.26% 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
- --------------------------------------------------------------------------------
Unaudited
For a share outstanding throughout each period
Financial Highlights
- --------------------------------------------------------------------------------
6 Months Year 12/30/92
Ended Ended Through
6/30/98 12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
NET ASSET VALUE
Beginning
of period $ 20.13 $ 16.37 $ 13.81 $ 11.04 $ 11.48 $ 10.00
Investment
activities
Net investment
income 0.24 0.44 0.35 0.36** 0.35* 0.29*
Net realized
and unrealized
gain (loss) 1.68 4.51 3.08 3.08 (0.11) 1.63
Total from
investment
activities 1.92 4.95 3.43 3.44 0.24 1.92
Distributions
Net investment
income (0.23) (0.44) (0.36) (0.36) (0.34) (0.29)
Net realized
gain (0.13) (0.75) (0.51) (0.31) (0.34) (0.15)
Total
distributions (0.36) (1.19) (0.87) (0.67) (0.68) (0.44)
NET ASSET VALUE
End of period $ 21.69 $ 20.13 $ 16.37 $ 13.81 $ 11.04 $ 11.48
------------------------------------------------------------
Ratios/Supplemental Data
Total return(C) 9.54% 30.77% 25.36% 31.75%** 2.16%* 19.41%*
Ratio of expenses to
average net assets 0.76%! 0.80% 1.10% 1.10%** 1.00%* 1.00%*
Ratio of net
investment
income to
average
net assets 2.24%! 2.42% 2.53% 2.92%** 3.11%* 2.60%*
Portfolio
turnover rate 20.6% 39.1% 43.1% 56.1% 71.4% 51.2%
Net assets,
end of period
(in millions) $ 1,069 $ 747 $ 209 $ 85 $ 54 $ 41
(C) Total return reflects the rate that an investor would have earned on an
investment in the fund during each period, assuming reinvestment of all
distributions.
* 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.
! Annualized.
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Dividend Growth Fund
- --------------------------------------------------------------------------------
Unaudited June 30, 1998
Statement of Net Assets
Shares/Par Value
- -----------------------------------------------------------------------------
In thousands
Common Stocks 82.5%
FINANCIAL 17.9%
Bank and Trust 6.2%
BANC ONE 220,000 $ 12,279
First Union 170,000 9,902
Mellon Bank 160,000 11,140
NationsBank 80,000 6,120
Norwest 210,000 7,849
U.S. Bancorp 150,000 6,450
Washington Mutual 165,000 7,162
Wells Fargo 13,000 4,797
65,699
Insurance 6.8%
ACE Limited 350,000 13,650
Erie Indemnity 290,000 8,338
EXEL 210,000 16,341
Mid Ocean Limited 80,000 6,280
PartnerRe Holdings 230,000 11,730
St. Paul Companies 80,000 3,365
Travelers Property Casualty
(Class A) 160,000 6,860
Willis-Corroon ADR 500,000 6,281
72,845
Financial Services 4.9%
Associates First Capital
(Class A) 115,000 8,841
Fannie Mae 270,000 16,402
Freddie Mac 100,000 4,706
INMC Mortgage Holdings 480,000 10,920
SLM Holding 40,000 1,960
Travelers Group 160,000 9,700
52,529
Total Financial 191,073
UTILITIES 5.9%
Telephone Services 2.6%
ALLTEL 250,000 11,625
SBC Communications 420,000 16,800
28,425
Electric Utilities 3.3%
DPL 350,000 $ 6,344
DQE 165,000 5,940
Duke Energy 100,000 5,925
FPL Group 70,000 4,410
NIPSCO 180,000 5,040
Teco Energy 280,000 7,507
35,166
Total Utilities 63,591
CONSUMER NONDURABLES 16.3%
Cosmetics 0.4%
International Flavors
& Fragrances 100,000 4,344
4,344
Beverages 1.2%
Anheuser-Busch 100,000 4,719
PepsiCo 200,000 8,237
12,956
Food Processing 1.7%
General Mills 40,000 2,735
McCormick 210,000 7,501
Sara Lee 150,000 8,390
18,626
Hospital Supplies/Hospital Management 1.0%
Abbott Laboratories 250,000 10,219
Smith & Nephew (GBP) 364,100 909
11,128
Pharmaceuticals 4.7%
American Home Products 220,000 11,385
Bristol-Myers Squibb 100,000 11,494
Johnson & Johnson 140,000 10,325
Merck 40,000 5,350
Pfizer 60,000 6,521
Schering-Plough 50,000 4,581
49,656
Miscellaneous Consumer Products 7.3%
Colgate-Palmolive 90,000 $ 7,920
Hasbro 240,000 9,435
Newell 230,000 11,457
Philip Morris 400,000 15,750
Service Corp. International 195,000 8,360
Stanley Works 130,000 5,403
Sysco 185,000 4,741
Tomkins (GBP) 1,100,000 5,974
Tomkins ADR 370,000 8,464
77,504
Total Consumer Nondurables 174,214
CONSUMER SERVICES 5.3%
General Merchandisers 0.7%
Warnaco Group(Class A) 180,000 7,639
7,639
Specialty Merchandisers 1.8%
American Stores 200,000 4,837
Rite Aid 370,000 13,898
18,735
Entertainment and Leisure 1.2%
Carnival(Class A) 220,000 8,718
Disney 35,000 3,677
12,395
Media and Communications 1.6%
R.R. Donnelly 125,000 5,719
Tribune 125,000 8,602
Wolters Kluwer (NLG) 24,000 3,296
17,617
Total Consumer Services 56,386
CONSUMER CYCLICALS 12.5%
Automobiles and Related 0.5%
Genuine Parts 160,000 5,530
5,530
Building and Real Estate 10.1%
Arden Realty, REIT 270,000 $ 6,986
Chelsea GCA, REIT 139,500 5,580
Crescent Real Estate
Equities, REIT 460,000 15,467
Manufactured Home
Communities, REIT 400,000 9,650
Nationwide Health
Properties, REIT 260,000 6,208
Reckson Associates
Realty, REIT 320,000 7,560
Reckson Service
Industries * 112,000 382
Security Capital
Industrial Trust, REIT 650,000 16,250
SECURITY CAPITAL
PACIFIC TRUST, REIT 400,000 9,000
Starwood Hotels &
Resorts, REIT 270,000 13,044
Storage USA, REIT 200,000 7,000
United Dominion
Realty Trust, REIT 300,000 4,163
Weeks, REIT 220,000 6,957
108,247
Miscellaneous Consumer Durables 1.9%
Masco 170,000 10,285
Valspar 240,000 9,510
19,795
Total Consumer Cyclicals 133,572
TECHNOLOGY 3.7%
Electronic Components 0.3%
Analogic 80,000 3,580
3,580
Electronic Systems 0.9%
Hewlett-Packard 150,000 8,981
8,981
Aerospace and Defense 2.5%
AlliedSignal 410,000 18,194
Raytheon (Class B) 140,000 8,278
26,472
Total Technology 39,033
CAPITAL EQUIPMENT 2.4%
Electrical Equipment 1.1%
GE 55,000 5,005
Hubbell (Class A) 81,700 3,564
Hubbell (Class B) 90,000 $ 3,746
12,315
Machinery 1.3%
Danaher 170,000 6,237
Teleflex 200,000 7,600
13,837
Total Capital Equipment 26,152
BUSINESS SERVICES AND
TRANSPORTATION 7.7%
Computer Service and Software 1.8%
Automatic Data Processing 80,000 5,830
First Data 100,000 3,331
Galileo International 220,000 9,914
19,075
Environmental 1.1%
Rentokil Group(GBP) 1,600,000 11,514
11,514
Miscellaneous Business Services 4.0%
Equifax 250,000 9,078
H&R Block 140,000 5,897
Omnicom 240,000 11,970
RPM 350,000 5,950
ServiceMaster 170,000 6,471
Wallace Computer Services 130,000 3,088
42,454
Railroads 0.8%
Norfolk Southern 300,000 8,944
8,944
Total Business Services and Transportation 81,987
ENERGY 6.0%
Energy Services 0.4%
Witco 150,000 4,387
4,387
Integrated Petroleum - Domestic 1.5%
British Petroleum ADR 180,000 15,885
15,885
Integrated Petroleum - International 4.1%
Amoco 240,000 $ 9,990
Chevron 90,000 7,476
Mobil 255,000 19,539
Royal Dutch Petroleum ADR 130,000 7,126
44,131
Total Energy 64,403
PROCESS INDUSTRIES 2.9%
Diversified Chemicals 0.9%
Hercules 230,000 9,459
9,459
Specialty Chemicals 1.3%
Great Lakes Chemical 210,000 8,282
Sigma Aldrich 140,000 4,926
13,208
Paper and Paper Products 0.7%
Kimberly-Clark 170,000 7,799
7,799
Total Process Industries 30,466
BASIC MATERIALS 0.7%
Mining 0.7%
Newmont Mining 130,000 3,071
Rio Tinto (GBP) 400,000 4,508
Total Basic Materials 7,579
Miscellaneous Common Stocks 1.2% 13,331
Total Common Stocks (Cost $719,862) 881,787
Preferred Stocks 0.2%
Cleveland Electric,
(Series L), $1.88 Adj. 22,560 2,256
Cleveland Electric,
(Series R), 8.80% 320 346
Total Preferred Stocks (Cost $1,905) 2,602
Convertible Preferred Stocks 0.8%
Reckson Associates Realty,
(Series A), 7.625% * 240,000 $ 5,700
Union Pacific Capital Trust,
(144a), 6.25% 55,000 2,592
Total Convertible Preferred Stocks
(Cost $8,709) 8,292
Convertible Bonds 0.7%
Bell Atlantic Financial Services,
(144a), 5.75%, 4/1/03 $2,000,000 2,049
Security Capital U S. Realty,
(144a), 2.00%, 5/22/03 7,000,000 5,735
Total Convertible Bonds (Cost $7,635) 7,784
U.S. Government Obligations/
Agencies 5.0%
U.S. Treasury Notes
5.375%, 2/15/01 7,000,000 6,976
5.625%, 5/15/01 - 2/15/06 5,500,000 5,518
5.75%, 11/15/00 - 8/15/03 17,400,000 17,489
5.875%, 2/28/99 - 9/30/02 9,000,000 9,058
6.00%, 8/15/99 - 8/15/00 4,700,000 4,742
6.125%, 12/31/01 1,500,000 1,527
6.25%, 3/31/99 - 2/28/02 3,400,000 3,443
6.375%, 5/15/99 500,000 504
6.50%, 5/31/01 - 5/31/02 2,500,000 2,580
6.625%, 5/15/07 1,000,000 1,074
Total U.S. Government
Obligations/Agencies (Cost $52,529) 52,911
Short-Term Investments 10.7%
Money Market Funds 10.7%
Reserve Investment Fund, 5.69% # 114,568,466 114,568
Total Short-Term Investments (Cost $114,568) 114,568
Total Investments in Securities
99.9% of Net Assets (Cost $905,208) $ 1,067,944
Other Assets Less Liabilities 681
NET ASSETS $ 1,068,625
------------
Net Assets Consist of:
Accumulated net investment income
- net of distributions $ 309
Accumulated net realized gain/loss
- net of distributions 40,210
Net unrealized gain (loss) 162,738
Paid-in-capital applicable to 49,256,767
shares of $0.0001 par value capital stock
outstanding; 1,000,000,000 shares
authorized 865,368
NET ASSETS $ 1,068,625
------------
NET ASSET VALUE PER SHARE $ 21.69
------------
* Non-income producing
# Seven-day yield
ADR American Depository Receipt
REIT Real Estate Investment Trust
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 period-end amounts
to 0.97% of net assets.
GBP British sterling
NLG Dutch guilder
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Dividend Growth Fund
- --------------------------------------------------------------------------------
Unaudited
Statement of Operations
- --------------------------------------------------------------------------------
In thousands
6 Months
Ended
6/30/98
Investment Income
Income
Dividend $ 9,905
Interest 4,360
Total income 14,265
Expenses
Investment management 2,475
Shareholder servicing 867
Registration 153
Prospectus and shareholder reports 59
Custody and accounting 55
Legal and audit 7
Directors 4
Miscellaneous 6
Total expenses 3,626
Net investment income 10,639
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 40,046
Foreign currency transactions (36)
Net realized gain (loss) 40,010
Change in net unrealized gain or loss
Securities 31,721
Other assets and liabilities
denominated in foreign currencies 2
Change in net unrealized gain or loss 31,723
Net realized and unrealized gain (loss) 71,733
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 82,372
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Dividend Growth Fund
- --------------------------------------------------------------------------------
Unaudited
Statement of Changes in Net Assets
- --------------------------------------------------------------------------------
In thousands
6 Months Year
Ended Ended
6/30/98 12/31/97
Increase (Decrease) in Net Assets
Operations
Net investment income $ 10,639 $ 12,272
Net realized gain (loss) 40,010 28,069
Change in net unrealized gain or loss 31,723 96,262
Increase (decrease) in net assets
from operations 82,372 136,603
Distributions to shareholders
Net investment income (10,901) (13,152)
Net realized gain (5,950) (24,253)
Decrease in net assets
from distributions (16,851) (37,405)
Capital share transactions*
Shares sold 405,354 559,369
Distributions reinvested 15,894 35,245
Shares redeemed (165,626) (157,461)
Increase (decrease) in net
assets from capital
share transactions 255,622 437,153
Net equalization 571 1,062
Net Assets
Increase (decrease) during period 321,714 537,413
Beginning of period 746,911 209,498
End of period $ 1,068,625 $ 746,911
----------------------------------
*Share information
Shares sold 19,181 31,018
Distributions reinvested 731 1,825
Shares redeemed (7,751) (8,547)
Increase (decrease) in
shares outstanding 12,161 24,296
The accompanying notes are an integral part of these financial statements.
T. Rowe Price Dividend Growth Fund
- --------------------------------------------------------------------------------
Unaudited June 30, 1998
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.
The accompanying financial statements are prepared in accordance with generally
accepted accounting principles for the investment company industry; these
principles may require the use of estimates by fund management.
Valuation Equity securities listed or regularly traded on a securities exchange
are valued at the last quoted sales price on the day 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.
Investments in mutual funds are valued at the closing net asset value per share
of the mutual fund on the day of valuation.
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 are amortized
for both financial reporting and 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
Purchases and sales of portfolio securities, other than short-term and U.S.
government securities, aggregated $363,798,000 and $174,632,000, respectively,
for the six months ended June 30, 1998.
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.
At June 30, 1998, the aggregate cost of investments for federal income tax and
financial reporting purposes was $905,208,000, and net unrealized gain
aggregated $162,736,000, of which $175,762,000 related to appreciated
investments and $13,026,000 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 $448,000 was payable at June 30, 1998. 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 0.30% for assets in excess of $80 billion. At June
30, 1998, and for the six months then ended, the effective annual group fee rate
was 0.32%. The fund pays a pro-rata share of the group fee based on the ratio of
its net assets to those of the group.
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 $709,000 for the six months
ended June 30, 1998, of which $135,000 was payable at period-end.
The fund may invest in the Reserve Investment Fund and Government Reserve
Investment Fund (collectively, the Reserve Funds), open-end management
investment companies managed by T. Rowe Price Associates, Inc. The Reserve Funds
are offered as cash management options only to mutual funds and other accounts
managed by T. Rowe Price and its affiliates and are not available to the public.
The Reserve Funds pay no investment management fees. Distributions from the
Reserve Funds to the fund for the six months ended June 30, 1998, totaled
$2,909,000 and are reflected as interest income in the accompanying Statement of
Operations.
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
410-625-6500 Baltimore area
To open a Discount Brokerage
account or obtain information,
call: 1-800-638-5660 toll free
Internet address:
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
T. Rowe Price, Invest With Confidence (registered trademark)
T. Rowe Price Investment Services, Inc., Distributor.
F58-051 6/30/98
