<PAGE>
Annual Report
DIVIDEND
GROWTH
FUND
-----------------
DECEMBER 31, 1997
-----------------
[LOGO OF T. ROWE PRICE APPEARS HERE]
<PAGE>
REPORT HIGHLIGHTS
- --------------------------------------------------------------------------------
Dividend Growth Fund
. Despite a sell-off in October when Asian markets collapsed, U.S. stocks
advanced strongly for the third straight year.
. The fund's returns of 13.49% and 30.77% for the 6- and 12-month periods,
respectively, surpassed the Lipper Growth & Income Funds Average. The fund
exceeded the S&P 500 for the six months but not the year.
. Amid Far East turmoil, investors sought high-quality, domestically focused
companies, which benefited fund performance.
. Barring a major change in the environment, we look for positive but less
robust returns in 1998.
<PAGE>
FELLOW SHAREHOLDERS
U.S. stocks sprinted to the finish line and closed out 1997 with outstanding
returns. The Dow Jones Industrial Average rose more than 20% for a
record-setting third consecutive year and capped off the best 10-year stretch in
its 101-year history. Resurgent corporate profits, receding inflation, downward
trending interest rates, and flourishing global free trade combined to provide a
positive backdrop for stock prices over the last 10 years and again in 1997.
U.S. stocks fell in October when currency devaluations and stock market plunges
in several Far Eastern countries caused investors to question the sustainability
of corporate profit growth. Nevertheless, stocks rose into year-end with
consumer confidence rising to all-time highs in December.
The Dividend Growth Fund posted healthy returns, rising 13.49% in the second
half and 30.77% for the full year, handily outpacing the Lipper Growth & Income
Funds Average. The fund also surpassed the broad market as represented by the
unmanaged Standard & Poor's 500 Stock Index for the six months but trailed
modestly for the full year.
- ----------------------
PERFORMANCE COMPARISON
- -------------------------------------------------
Periods Ended 12/31/97 6 Months 12 Months
- -------------------------------------------------
Dividend Growth Fund 13.49% 30.77%
.................................................
S&P 500 10.58 33.36
.................................................
Lipper Growth & Income
Funds Average 9.93 27.14
.................................................
YEAR-END DISTRIBUTIONS
Your Board of Directors declared a fourth quarter dividend of $0.14 per share, a
short-term capital gain of $0.26 per share, and a long-term capital gain of
$0.34 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.
1
<PAGE>
LONG-TERM PERSPECTIVE
- ------------------------
COMPOUNDING OF DIVIDENDS
- --------------------------------------------------------------------------------
[LINE GRAPH APPEARS HERE]
12/31/93 2.93
12/31/94 3.58
12/31/95 4.03
12/31/96 4.27
12/31/97 5.50
Annual yield on an initial investment of $1,000 at the Dividend Growth Fund's
inception of 12/30/92.
Dividend distributions on the investment were $29.29 in 1993, $35.82 in 1994,
$40.27 in 1995, $42.70 in 1996, and $55.02 in 1997.
Yield is based on the assumption that all dividends and capital gains paid by
the fund are reinvested in additional shares. Dividends paid on the rising
number of shares are expressed as a return on the original $1,000 investment.
We launched the Dividend Growth Fund five years ago because we believed that
buying stocks of companies with consistently strong earnings and dividend growth
would lead to attractive total returns and rising dividends for our
shareholders. So far, our results have been encouraging. The fund's cumulative
163.5% five-year gain is ahead of both the Lipper Growth & Income Funds Average
(125.2%) and the S&P 500 (151.6%). Also important, fund dividends have grown
each year. As the chart shows, 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 five years. 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.
PERFORMANCE REVIEW
The fund's strong second half performance resulted from sizable rebounds in many
of our steadier growth holdings, particularly those most insulated from
potential earnings disruption in the Far East. In the first half of 1997,
investors heavily favored large companies that were benefiting from the higher
economic growth in emerging markets. By October though, as currency and market
declines spread throughout the Far East, investors turned their favor to high-
quality domestically focused sectors such as telephone service providers, banks,
insurance companies, electric utilities, and REITs. These sectors were also
buoyed by falling interest rates. Perhaps one of the few
2
<PAGE>
positive outcomes of the turmoil in the Far East has been reduced global
inflation expectations, which allowed long-term interest rates to test their
lows of the last 20 years.
SBC Communications, ALLTEL, and BellSouth, our three telephone service provider
holdings, rose significantly after extended periods of underperformance. Their
valuations became too attractive to ignore once it became clear that 1996's
telecommunications legislation would have a less-than-catastrophic effect on
their businesses.
In financial services, Fannie Mae, ACE Limited, Norwest, Mellon Bank, and EXEL
rose handsomely as their earnings and dividends continued to grow faster than
market averages.
NIPSCO, FPL Group, and DPL, three of our favorite electric utilities, all
performed very well as investors sought out their predictable, albeit moderate,
earnings and dividend growth. The rebounds in this sector show what can happen
when a sector returns to favor after lagging for a long period.
Security Capital Industrial Trust, Starwood Lodging, and SECURITY CAPITAL
PACIFIC TRUST, three of our larger REIT holdings, rose nicely as they continued
to supplement their growth with healthy acquisitions. Starwood stunned the
lodging industry with its announced acquisition of ITT Industries, a company
three times its size. Although the acquisition looks good on paper, Starwood
must now close the deal and run the business well to garner good returns for
shareholders. We are optimistic about the prospects for successful execution but
will continue to monitor the company's progress closely.
Our worst performers were companies whose earnings did not meet expectations.
American Stores and Corning both announced disappointing results that
[PIE CHART SHOWING SECTOR DIVERSIFICATION]
- ----------------------
SECTOR DIVERSIFICATION
- ----------------------------
Consumer 25%
Financial 18%
Business Services
and Transportation 7%
REITs 9%
Utilities 7%
Energy 6%
Other 17%
Reserves 11%
Based on net assets as of 12/31/97.
3
<PAGE>
led to swift and severe price declines. Although we sold some of the former and
all of the latter, we are following both stocks closely and would buy shares
again under the right circumstances.
PORTFOLIO CHANGES
We work closely with other T. Rowe Price portfolio managers and analysts to
monitor existing investment ideas and to find new ones. Several second half
purchases look particularly interesting. We made a significant investment in
Omnicom, a global advertising leader with rapidly growing business around the
globe. The company generates consistent and growing free cash flow and has a
solid track record of reinvesting the money in new agencies. We believe we paid
a fair price for a company with well-above-average earnings and dividend growth.
Travelers Property Casualty was another large purchase. The stock had declined
about 15% from recent highs while business prospects remained relatively bright.
A smart, acquisitive management has been reducing costs while preparing the
company for another acquisition to offset difficult conditions in insurance
markets. We purchased Amoco after recent declines in energy prices led to
weakness in energy-related stocks. A diversified producer of natural gas, oil,
and chemicals, Amoco has picked up the pace of its efficiency improvement
efforts in an effort to jump-start its growth. Although we don't expect "home
run" performance, we do think Amoco can deliver decent returns with only
moderate risk.
SUMMARY AND OUTLOOK
U.S. companies have significantly improved productivity and profitability over
the last 10 years. As a result, profit margins are near post-war highs and free
cash flow (earnings left after capital spending) has reached new heights.
Additionally, in contrast to previous economic cycles, corporate managers
continue to aggressively pursue efficiencies and are not resting on laurels. We
find ourselves pleased with corporate behavior. However, stock prices have risen
faster than earnings for some time now and valuations look high by most
measures. Continued share price gains depend on additional earnings growth,
moderate inflation, and flat or falling interest rates. Of these three, we are
most worried about earnings and will watch our holdings closely for signs of
significant change. Barring a major change in the environment, we look for
positive but less ebullient returns in 1998.
4
<PAGE>
We continue to focus on companies with sustainable earnings, free cash flow, and
dividend growth. To reduce risk, we will try to buy on weakness and remain
conscious of how much we get for what we pay. This approach has worked well over
the last five years, and we think it will remain productive.
Thank you for your continuing support.
Respectfully submitted,
/s/ William J. Stromberg
William J. Stromberg
President and Chairman of the Investment Advisory Committee
January 18, 1998
5
<PAGE>
T. ROWE PRICE DIVIDEND GROWTH FUND
- ------------------------------------------------------------------------------
- --------------------
PORTFOLIO HIGHLIGHTS
- --------------------------------------------------------------------------------
MAJOR PORTFOLIO CHANGES
Listed in descending order of size
6 Months Ended December 31, 1997
Ten Largest Purchases Ten Largest Sales
- -------------------------------------------------------------------------------
INMC Mortgage Holdings * Corporate Express
....................................... ......................................
Amoco * Analysts International **
....................................... ......................................
Travelers Property Casualty * UNUM **
....................................... ......................................
Galileo International * Knight-Ridder **
....................................... ......................................
AlliedSignal Sprint **
....................................... ......................................
Philip Morris ADT Operations **
....................................... ......................................
British Petroleum Nationwide Financial Services **
....................................... ......................................
First Union * Gannett **
....................................... ......................................
Mobil SPX **
....................................... ......................................
PartnerRe Holdings Interpublic Group **
....................................... ......................................
* Position added
** Position eliminated
6
<PAGE>
T. ROWE PRICE DIVIDEND GROWTH FUND
- -------------------------------------------------------------------------------
- --------------------
PORTFOLIO HIGHLIGHTS
- -------------------------------------------------------------------------------
TWENTY-FIVE LARGEST HOLDINGS
Percent of
Net Assets
12/31/97
- ------------------------------------------------------------------------------
Fannie Mae 2.1%
..............................................................................
Mobil 1.9
..............................................................................
SBC Communications 1.6
..............................................................................
AlliedSignal 1.6
..............................................................................
Mellon Bank 1.5
- ------------------------------------------------------------------------------
Philip Morris 1.5
..............................................................................
Mid Ocean Limited 1.5
..............................................................................
British Petroleum 1.4
..............................................................................
Security Capital Industrial Trust 1.4
..............................................................................
PartnerRe Holdings 1.4
- ------------------------------------------------------------------------------
ACE Limited 1.3
..............................................................................
EXEL 1.2
..............................................................................
Omnicom 1.2
..............................................................................
Time Warner LYONs 1.2
..............................................................................
BANC ONE 1.1
- ------------------------------------------------------------------------------
Newell 1.0
..............................................................................
Valspar 1.0
..............................................................................
Teco Energy 1.0
..............................................................................
INMC Mortgage Holdings 1.0
..............................................................................
TriMas 1.0
- ------------------------------------------------------------------------------
Service Corp. International 1.0
..............................................................................
Norwest 1.0
..............................................................................
Royal Dutch Petroleum 0.9
..............................................................................
Rentokil Group 0.9
..............................................................................
Kimberly-Clark 0.9
- ------------------------------------------------------------------------------
Total 31.6%
7
<PAGE>
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.
[DIVIDEND GROWTH FUND LINE GRAPH APPEARS HERE]
S&P 500 Dividend Growth
Date Index Fund
---- ------ ----
12/30/92 10,000 10,000
12/31/93 11,008 11,941
12/31/94 11,153 12,119
12/31/95 15,345 16,072
12/31/96 18,868 20,147
12/31/97 25,163 26,346
- ------------------------------------
AVERAGE ANNUAL COMPOUND TOTAL RETURN
- --------------------------------------------------------------------------------
This table shows how the fund would have performed if its actual (or cumulative)
returns for the periods shown had been earned at a constant rate each year.
Since Inception
Periods Ended 12/31/97 1 Year 3 Years 5 Years Inception Date
- -------------------------------------------------------------------------------
Dividend Growth Fund 30.77% 29.26% 21.38% 21.38% 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.
8
<PAGE>
T. ROWE PRICE DIVIDEND GROWTH FUND
- --------------------------------------------------------------------------------
- --------------------
FINANCIAL HIGHLIGHTS For a share outstanding throughout each period
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Year 12/30/92
Ended Through
12/31/97 12/31/96 12/31/95 12/31/94 12/31/93
<S> <C> <C> <C> <C> <C>
NET ASSET VALUE
Beginning of period $ 16.37 $ 13.81 $ 11.04 $ 11.48 $ 10.00
......................................................
Investment activities
Net investment income 0.44 0.35 0.36** 0.35* 0.29*
Net realized and
unrealized gain (loss) 4.51 3.08 3.08 (0.11) 1.63
......................................................
Total from
investment activities 4.95 3.43 3.44 0.24 1.92
......................................................
Distributions
Net investment income (0.44) (0.36) (0.36) (0.34) (0.29)
Net realized gain (0.75) (0.51) (0.31) (0.34) (0.15)
......................................................
Total distributions (1.19) (0.87) (0.67) (0.68) (0.44)
......................................................
NET ASSET VALUE
End of period $ 20.13 $ 16.37 $ 13.81 $ 11.04 $ 11.48
------------------------------------------------------
Ratios/Supplemental Data
Total return 30.77% 25.36% 31.75%** 2.16%* 19.41%*
...................................................................................
Ratio of expenses to
average net assets 0.80% 1.10% 1.10%** 1.00%* 1.00%*
...................................................................................
Ratio of net investment
income to average
net assets 2.42% 2.53% 2.92%** 3.11%* 2.60%*
...................................................................................
Portfolio turnover rate 39.1% 43.1% 56.1% 71.4% 51.2%
...................................................................................
Average commission
rate paid $ 0.0459 $ 0.0478 - - -
...................................................................................
Net assets, end of period
(in thousands) $746,911 $ 209,498 $ 84,500 $ 53,597 $ 40,862
...................................................................................
</TABLE>
* 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.
9
<PAGE>
T. ROWE PRICE DIVIDEND GROWTH FUND
- -------------------------------------------------------------------------------
December 31, 1997
<TABLE>
<CAPTION>
- -----------------------
STATEMENT OF NET ASSETS Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
COMMON STOCKS 83.8%
FINANCIAL 18.5%
<S> <C> <C>
Bank and Trust 6.3%
BANC ONE 150,000 $ 8,147
...............................................................................
First Union 90,000 4,612
...............................................................................
Mellon Bank 190,000 11,519
...............................................................................
National City 40,000 2,630
...............................................................................
National Commerce Bancorporation 100,000 3,500
...............................................................................
Norwest 185,000 7,146
...............................................................................
U.S. Bancorp 40,000 4,478
...............................................................................
Washington Mutual 80,000 5,102
...............................................................................
47,134
................
Insurance 8.4%
ACE Limited 100,000 9,650
...............................................................................
Erie Indemnity 156,900 4,687
...............................................................................
EXEL 145,000 9,189
...............................................................................
Mid Ocean Limited 200,000 10,850
...............................................................................
PartnerRe Holdings ADR 220,000 10,203
...............................................................................
St. Paul Companies 70,000 5,744
...............................................................................
Travelers Property Casualty (Class A) 150,000 6,600
...............................................................................
Willis-Corroon ADR 440,000 5,418
...............................................................................
62,341
................
Financial Services 3.8%
Fannie Mae 280,000 15,977
...............................................................................
INMC Mortgage Holdings 310,000 7,266
...............................................................................
Travelers Group 100,000 5,387
...............................................................................
28,630
................
Total Financial 138,105
...............................................................................
UTILITIES 7.1%
Telephone Services 3.0%
ALLTEL 155,000 6,365
................................................................................
</TABLE>
10
<PAGE>
T. ROWE PRICE DIVIDEND GROWTH FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
BellSouth 80,000 $ 4,505
...............................................................................
SBC Communications 160,000 11,720
...............................................................................
22,590
................
Electric Utilities 4.1%
DPL 120,000 3,450
...............................................................................
DQE 150,000 5,269
...............................................................................
Duke Energy 100,000 5,537
...............................................................................
FPL Group 70,000 4,143
...............................................................................
NIPSCO 95,000 4,696
...............................................................................
Teco Energy 270,000 7,594
...............................................................................
30,689
................
Total Utilities 53,279
................
CONSUMER NONDURABLES 18.9%
Cosmetics 0.5%
International Flavors & Fragrances 70,000 3,605
...............................................................................
3,605
................
Beverages 1.2%
Anheuser-Busch 60,000 2,640
...............................................................................
PepsiCo 170,000 6,194
...............................................................................
8,834
................
Food Processing 3.9%
Cadbury Schweppes (GBP) 450,000 4,542
...............................................................................
General Mills 30,000 2,149
...............................................................................
International Multifoods 106,100 3,004
...............................................................................
McCormick 210,000 5,893
...............................................................................
Nabisco Holdings (Class A) 120,000 5,813
...............................................................................
Ralston Purina 25,000 2,323
...............................................................................
Sara Lee 100,000 5,631
...............................................................................
29,355
................
Hospital Supplies/Hospital Management 1.8%
Abbott Laboratories 85,000 5,573
...............................................................................
Allergan 120,000 4,027
...............................................................................
Smith & Nephew (GBP) 1,500,000 4,435
...............................................................................
14,035
................
</TABLE>
11
<PAGE>
T. ROWE PRICE DIVIDEND GROWTH FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Pharmaceuticals 3.9%
American Home Products 90,000 $ 6,885
...............................................................................
Johnson & Johnson 70,000 4,611
...............................................................................
Merck 55,000 5,844
...............................................................................
Pfizer 80,000 5,965
...............................................................................
Schering-Plough 50,000 3,106
...............................................................................
SmithKline Beecham ADR 50,000 2,572
...............................................................................
28,983
.................
Miscellaneous Consumer Products 7.6%
Colgate-Palmolive 90,000 6,615
...............................................................................
Mattel 130,000 4,843
...............................................................................
Newell 180,000 7,650
...............................................................................
Philip Morris 250,000 11,328
...............................................................................
Service Corp. International 195,000 7,203
...............................................................................
Stanley Works 85,000 4,011
...............................................................................
Sysco 80,000 3,645
...............................................................................
Tomkins (GBP) 1,000,000 4,730
...............................................................................
Tomkins ADR 350,000 6,694
...............................................................................
56,719
.................
Total Consumer Nondurables 141,531
.................
CONSUMER SERVICES 4.7%
General Merchandisers 0.7%
Warnaco Group (Class A) 170,000 5,334
...............................................................................
5,334
.................
Specialty Merchandisers 0.6%
American Stores 200,000 4,112
...............................................................................
4,112
.................
Entertainment and Leisure 1.3%
Carnival ADR (Class A) 120,000 6,645
...............................................................................
Disney 30,000 2,972
...............................................................................
9,617
.................
Media and Communications 2.1%
R.R. Donnelly 130,000 4,842
...............................................................................
TCA Cable TV 70,000 3,242
...............................................................................
</TABLE>
12
<PAGE>
T. ROWE PRICE DIVIDEND GROWTH FUND
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Tribune 60,000 $ 3,735
..............................................................................
Vodafone ADR 55,000 3,988
..............................................................................
15,807
................
Total Consumer Services 34,870
................
CONSUMER CYCLICALS 11.1%
Automobiles and Related 1.0%
Echlin 100,000 3,619
..............................................................................
Genuine Parts 130,000 4,412
..............................................................................
8,031
................
Building and Real Estate 8.4%
AMB Property, REIT 100,000 2,513
..............................................................................
Arden Realty, REIT 140,000 4,305
..............................................................................
Chelsea GCA, REIT 120,000 4,583
..............................................................................
Crescent Real Estate Equities, REIT 100,000 3,938
..............................................................................
Equity Office Properties, REIT 70,000 2,209
..............................................................................
Franchise Finance, REIT 150,000 4,050
..............................................................................
Nationwide Health Properties, REIT 230,000 5,865
..............................................................................
Reckson Associates Realty, REIT 170,000 4,314
..............................................................................
Security Capital Industrial Trust, REIT 430,000 10,696
..............................................................................
SECURITY CAPITAL PACIFIC TRUST, REIT 250,000 6,062
..............................................................................
Starwood Lodging, REIT 95,000 5,498
..............................................................................
Storage USA, REIT 110,000 4,393
..............................................................................
United Dominion Realty Trust, REIT 300,000 4,181
..............................................................................
62,607
................
Miscellaneous Consumer Durables 1.7%
Masco 100,000 5,087
..............................................................................
Valspar 240,000 7,650
..............................................................................
12,737
................
Total Consumer Cyclicals 83,375
................
TECHNOLOGY 2.9%
Electronic Components 0.4%
Analogic 80,000 3,020
..............................................................................
3,020
................
</TABLE>
13
<PAGE>
T. ROWE PRICE DIVIDEND GROWTH FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Electronic Systems 0.9%
Hewlett-Packard 110,000 $ 6,875
..............................................................................
6,875
................
Aerospace and Defense 1.6%
AlliedSignal 297,500 11,584
..............................................................................
11,584
................
Total Technology 21,479
................
CAPITAL EQUIPMENT 3.6%
Electrical Equipment 1.4%
GE 53,000 3,889
..............................................................................
Hubbell (Class A) 90,000 4,241
..............................................................................
Hubbell (Class B) 50,000 2,466
..............................................................................
10,596
................
Machinery 2.2%
Danaher 50,000 3,156
..............................................................................
Teleflex 150,000 5,662
..............................................................................
TriMas 210,000 7,219
..............................................................................
16,037
................
Total Capital Equipment 26,633
................
BUSINESS SERVICES AND
TRANSPORTATION 5.6%
Computer Service and Software 1.2%
Automatic Data Processing 70,000 4,296
..............................................................................
Galileo International 180,000 4,973
..............................................................................
9,269
................
Distribution Services 0.5%
Richfood Holdings 125,000 3,531
..............................................................................
3,531
................
Environmental 0.9%
Rentokil Group (GBP) 1,600,000 6,964
..............................................................................
6,964
................
Miscellaneous Business Services 3.0%
H&R Block 110,000 4,929
..............................................................................
Omnicom 210,000 8,899
..............................................................................
</TABLE>
14
<PAGE>
T. ROWE PRICE DIVIDEND GROWTH FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
RPM 200,000 $ 3,088
...............................................................................
Wallace Computer Services 130,000 5,054
...............................................................................
21,970
...............
Total Business Services and Transportation 41,734
...............
ENERGY 5.9%
Energy Services 0.8%
Witco 140,000 5,714
...............................................................................
5,714
...............
Integrated Petroleum - Domestic 1.4%
British Petroleum ADR 135,000 10,758
...............................................................................
10,758
...............
Integrated Petroleum - International 3.7%
Amoco 70,000 5,958
...............................................................................
Mobil 200,000 14,438
...............................................................................
Royal Dutch Petroleum ADR 130,000 7,044
...............................................................................
27,440
...............
Total Energy 43,912
...............
PROCESS INDUSTRIES 2.4%
Diversified Chemicals 0.6%
Hercules 90,000 4,506
...............................................................................
4,506
...............
Specialty Chemicals 0.9%
Great Lakes Chemical 140,000 6,282
...............................................................................
6,282
...............
Paper and Paper Products 0.9%
Kimberly-Clark 140,000 6,904
...............................................................................
6,904
...............
Total Process Industries 17,692
...............
BASIC MATERIALS 0.9%
Mining 0.9%
Newmont Mining 130,000 3,819
...............................................................................
</TABLE>
15
<PAGE>
T. ROWE PRICE DIVIDEND GROWTH FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Shares/Par Value
- --------------------------------------------------------------------------------
In thousands
<S> <C> <C>
Placer Dome 250,000 $ 3,172
..............................................................................
Total Basic Materials 6,991
............
Miscellaneous Common Stocks 2.2% 16,157
............
Total Common Stocks (Cost $496,621) 625,758
............
PREFERRED STOCKS 0.3%
Cleveland Electric, (Series L), $1.88 Adj. 22,560 2,165
..............................................................................
Cleveland Electric, (Series R), 8.80% 320 340
..............................................................................
Total Preferred Stocks (Cost $1,905) 2,505
............
CONVERTIBLE BONDS 1.5%
ALZA, LYONs, Sub. Notes, Zero Coupon, 7/14/14 $ 3,000,000 1,410
..............................................................................
Corporate Express, (144a) 4.50%, 7/1/00 1,200,000 1,099
..............................................................................
Time Warner, LYONs, Sr. Notes, Zero Coupon, 6/22/13 16,800,000 8,610
..............................................................................
Total Convertible Bonds (Cost $10,181) 11,119
............
U.S. GOVERNMENT OBLIGATIONS/
AGENCIES 3.2%
U. S. Treasury Notes
5.625%, 2/15/06 500,000 494
.......................................................................
5.75%, 8/15/03 400,000 400
.......................................................................
5.875%, 2/28/99 - 9/30/02 9,000,000 9,037
.......................................................................
6.00%, 8/15/99 - 8/15/00 4,700,000 4,732
.......................................................................
6.125%, 12/31/01 1,500,000 1,520
.......................................................................
6.25%, 3/31/99 - 2/28/02 3,400,000 3,439
.......................................................................
6.375%, 5/15/99 500,000 505
.......................................................................
6.50%, 5/31/01 - 5/31/02 2,500,000 2,571
.......................................................................
6.625%, 5/15/07 1,000,000 1,058
.......................................................................
Total U.S. Government Obligations/Agencies
(Cost $23,416) 23,756
............
SHORT-TERM INVESTMENTS 9.8%
Money Market Funds 9.8%
Reserve Investment Fund, 5.84% # 73,451,985 73,452
..............................................................................
Total Short-Term Investments (Cost $73,452) 73,452
............
</TABLE>
16
<PAGE>
T. ROWE PRICE DIVIDEND GROWTH FUND
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Value
- --------------------------------------------------------------------------------
In thousands
<S> <C>
Total Investments in Securities
98.6% of Net Assets (Cost $605,575) $ 736,590
Other Assets Less Liabilities 10,321
.............
NET ASSETS $ 746,911
-------------
Net Assets Consist of:
Accumulated net realized gain/loss - net of distributions 6,150
Net unrealized gain (loss) 131,015
Paid-in-capital applicable to 37,095,816 shares of $0.0001 par
value capital stock outstanding; 1,000,000,000 shares authorized 609,746
.............
NET ASSETS $ 746,911
-------------
NET ASSET VALUE PER SHARE $ 20.13
-------------
</TABLE>
# 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 year-end amounts to
0.15% of net assets.
GBP British sterling
LYONs Liquid Yield Option Notes
The accompanying notes are an integral part of these financial statements.
17
<PAGE>
T. ROWE PRICE DIVIDEND GROWTH FUND
- -------------------------------------------------------------------------------
- -----------------------
STATEMENT OF OPERATIONS
- --------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
Year
Ended
12/31/97
<S> <C>
Investment Income
Income
Dividend $ 11,167
Interest 5,169
...........
Total income 16,336
...........
Expenses
Investment management 2,659
Shareholder servicing 924
Registration 222
Custody and accounting 125
Prospectus and shareholder reports 93
Legal and audit 13
Directors 8
Miscellaneous 20
...........
Total expenses 4,064
...........
Net investment income 12,272
...........
Realized and Unrealized Gain (Loss)
Net realized gain (loss)
Securities 28,116
Foreign currency transactions (47)
...........
Net realized gain (loss) 28,069
...........
Change in net unrealized gain or loss on securities 96,262
...........
Net realized and unrealized gain (loss) 124,331
...........
INCREASE (DECREASE) IN NET
ASSETS FROM OPERATIONS $ 136,603
-----------
</TABLE>
The accompanying notes are an integral part of these financial statements.
18
<PAGE>
T. ROWE PRICE DIVIDEND GROWTH FUND
- -------------------------------------------------------------------------------
- ----------------------------------
STATEMENT OF CHANGES IN NET ASSETS
- --------------------------------------------------------------------------------
In thousands
<TABLE>
<CAPTION>
Year
Ended
12/31/97 12/31/96
<S> <C> <C>
Increase (Decrease) in Net Assets
Operations
Net investment income $ 12,272 $ 3,165
Net realized gain (loss) 28,069 7,385
Change in net unrealized gain or loss 96,262 20,575
........................
Increase (decrease) in net assets from operations 136,603 31,125
........................
Distributions to shareholders
Net investment income (13,152) (3,338)
Net realized gain (24,253) (5,269)
........................
Decrease in net assets from distributions (37,405) (8,607)
........................
Capital share transactions*
Shares sold 559,369 130,963
Distributions reinvested 35,245 7,902
Shares redeemed (157,461) (36,688)
........................
Increase (decrease) in net assets from capital
share transactions 437,153 102,177
........................
Net equalization 1,062 303
........................
Net Assets
Increase (decrease) during period 537,413 124,998
Beginning of period 209,498 84,500
........................
End of period $ 746,911 $ 209,498
------------------------
*Share information
Shares sold 31,018 8,636
Distributions reinvested 1,825 504
Shares redeemed (8,547) (2,460)
........................
Increase (decrease) in shares outstanding 24,296 6,680
</TABLE>
The accompanying notes are an integral part of these financial statements.
19
<PAGE>
T. ROWE PRICE DIVIDEND GROWTH FUND
- --------------------------------------------------------------------------------
December 31, 1997
- -----------------------------
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
20
<PAGE>
T. ROWE PRICE DIVIDEND GROWTH FUND
- -------------------------------------------------------------------------------
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 $506,819,000 and $175,756,000, respectively,
for the year ended December 31, 1997.
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, 1997. The results
of operations and net assets were not affected by the increases/(decreases) to
these accounts.
- --------------------------------------------------------------------------------
Undistributed net investment income $ (182,000)
Undistributed net realized gain (869,000)
Paid-in-capital 1,051,000
21
<PAGE>
T. ROWE PRICE DIVIDEND GROWTH FUND
- -------------------------------------------------------------------------------
At December 31, 1997, the aggregate cost of investments for federal income tax
and financial reporting purposes was $605,575,000, and net unrealized gain
aggregated $131,015,000, of which $134,158,000 related to appreciated
investments and $3,143,000 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 $317,000 was payable at December 31, 1997. 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. The
effective annual group fee rate was 0.32% at December 31, 1997, and 0.33% for
the year then ended. 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 was required
to bear any expenses through December 31, 1996, which would have caused 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 this agreement,
$5,000 of unaccrued 1995 fees were repaid during the year ended December 31,
1997.
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 $788,000 for the year ended
December 31, 1997, of which $95,000 was payable at period-end.
22
<PAGE>
T. ROWE PRICE DIVIDEND GROWTH FUND
- -------------------------------------------------------------------------------
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 year ended December 31, 1997, totaled
$1,186,000 and are reflected as interest income in the accompanying Statement of
Operations.
During the year ended December 31, 1997, the fund, in the ordinary course of
business, placed security purchase and sale orders aggregating $855,000 with
certain affiliates of the manager and paid commissions of $2,000 related
thereto.
- -----------------------------------------------------------
TAX INFORMATION (UNAUDITED) FOR THE TAX YEAR ENDED 12/31/97
- --------------------------------------------------------------------------------
We are providing this information as required by the Internal Revenue Code. The
amounts shown may differ from those elsewhere in this report because of
differences between tax and financial reporting requirements.
The fund's distributions to shareholders included:
. $11,486,000 from short-term capital gains, and
. $13,635,000 from long-term capital gains; of which $5,892,000 was subject
to the 20% rate gains category.
For corporate shareholders, 29% of the fund's distributed income and short-term
capital gains qualified for the dividends-received deduction.
- --------------------------------------------------------------------------------
23
<PAGE>
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, 1997, 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, 1997 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 21, 1998
24
<PAGE>
T. ROWE PRICE SHAREHOLDER SERVICES
- -------------------------------------------------------------------------------
INVESTMENT SERVICES AND INFORMATION
KNOWLEDGEABLE SERVICE REPRESENTATIVES
By Phone Shareholder service representatives are available from 8 a.m. to 10
p.m. ET Monday through Friday and from 8:30 a.m. to 5 p.m. ET on weekends. Call
1-800-225-5132 to speak directly with a representative who will be able to
assist you with your accounts.
In Person Visit one of our investor center locations to meet with a
representative who will be able to assist you with your accounts. You can also
drop off applications or obtain prospectuses and other literature at these
centers.
AUTOMATED 24-HOUR SERVICES
Tele*Access(R) Call 1-800-638-2587 to obtain information such as account
balance, date and amount of your last transaction, latest dividend payment, fund
prices, and yields. Additionally, you have the ability to request prospectuses,
statements, and account and tax forms; to reorder checks; and to initiate
purchase, redemption, and exchange orders for identically registered accounts.
T. Rowe Price OnLine Through a personal computer via dial-up modem, you can
replicate all the services available on Tele*Access plus conduct transactions in
your Discount Brokerage and Variable Annuity accounts.
ACCOUNT SERVICES
Checking Write checks for $500 or more on any money market and most bond fund
accounts (except the High Yield and Emerging Markets Bond Funds).
Automatic Investing Build your account over time by investing directly from
your bank account or paycheck with Automatic Asset Builder. Additionally,
Automatic Exchange enables you to set up systematic investments from one fund
account into another, such as from a money fund into a stock fund. A $50 minimum
makes it easy to get started.
25
<PAGE>
T. ROWE PRICE SHAREHOLDER SERVICES
- -------------------------------------------------------------------------------
Automatic Withdrawal If you need money from your fund account on a regular
basis, you can establish scheduled, automatic redemptions.
Dividend and Capital Gains Payment Options Reinvest all or some of your
distributions, or take them in cash. We give you maximum flexibility and
convenience.
DISCOUNT BROKERAGE*
Investments Available You can trade stocks, bonds, options, precious metals,
and other securities at a savings over regular commission rates.
To Open an Account Call a shareholder service representative for more
information.
INVESTMENT INFORMATION
Combined Statement A comprehensive overview of your T. Rowe Price accounts is
provided. The summary page gives you earnings by tax category, provides total
portfolio value, and lists your investments by type--stock, bond, and money
market. Detail pages itemize account transactions by fund.
Shareholder Reports Portfolio managers review the performance of the funds in
plain language and discuss T. Rowe Price's economic outlook.
T. Rowe Price Report This is a quarterly newsletter with relevant articles on
market trends, personal financial planning, and T. Rowe Price's economic
perspective.
Performance Update This quarterly report reviews recent market developments and
provides comprehensive performance information for every T. Rowe Price fund.
Insights This library of information includes reports on mutual fund tax
issues, investment strategies, and financial markets.
Detailed Investment Guides Our widely acclaimed Asset Mix Worksheet, College
Planning Kit, Diversifying Overseas: A Guide to International Investing,
Retirees Financial Guide, and Retirement Planning Kit (also available on disk
for PC use) can help you determine and reach your investment goals.
*A division of T. Rowe Price Investment Services, Inc. Member NASD/SIPC.
26
<PAGE>
T. ROWE PRICE MUTUAL FUNDS
- -------------------------------------------------------------------------------
STOCK FUNDS
..........................
Domestic
Blue Chip Growth
Capital Appreciation
Capital Opportunity
Diversified Small-Cap Growth
Dividend Growth
Equity Income
Equity Index 500
Extended Equity Market Index
Financial Services
Growth & Income
Growth Stock
Health Sciences
Media & Telecommunications*
Mid-Cap Growth
Mid-Cap Value
New America Growth
New Era New Horizons**
Real Estate Science & Technology
Small-Cap Stock
Small-Cap Value**
Spectrum Growth
Total Equity Market Index
Value
International/Global
Emerging Markets Stock
European Stock
Global Stock
International Discovery
International Stock
Japan
Latin America
New Asia
Spectrum International
BOND FUNDS
..........................
Domestic Taxable
Corporate Income
GNMA
High Yield
New Income
Short-Term Bond
Short-Term U.S. Government
Spectrum Income
Summit GNMA
Summit Limited-Term Bond
U.S. Treasury Intermediate
U.S. Treasury Long-Term
Domestic Tax-Free
California Tax-Free Bond
Florida Insured
Intermediate Tax-Free
Georgia Tax-Free Bond
Maryland Short-Term
Tax-Free Bond
Maryland Tax-Free Bond
New Jersey Tax-Free Bond
New York Tax-Free Bond
Summit Municipal Income
Summit Municipal
Intermediate
Tax-Free High Yield
Tax-Free Income
Tax-Free Insured
Intermediate Bond
Tax-Free Short-Intermediate
Virginia Short-Term
Tax-Free Bond
Virginia Tax-Free Bond
International/Global
Emerging Markets Bond
Global Government Bond
International Bond
MONEY MARKET FUNDS
..........................
Taxable
Prime Reserve
Summit Cash Reserves
U.S. Treasury Money
Tax-Free
California Tax-Free Money
New York Tax-Free Money
Summit Municipal
Money Market
Tax-Exempt Money
BLENDED ASSET FUNDS
..........................
Balanced
Personal Strategy Balanced
Personal Strategy Growth
Personal Strategy Income
Tax-Efficient Balanced
T. ROWE PRICE NO-LOAD
VARIABLE ANNUITY
..........................
Equity Income Portfolio
International Stock Portfolio
Limited-Term Bond Portfolio
Mid-Cap Growth Portfolio
New America Growth Portfolio
Personal Strategy Balanced Portfolio
Prime Reserve Portfolio
*Formerly the closed-end New Age Media Fund. Converted to open-end status on
7/28/97.
**Closed to new investors.
Please call for a prospectus. Read it carefully before you invest or send money.
The T. Rowe Price No-Load Variable Annuity [#V6021] is issued by Security
Benefit Life Insurance Company. In New York, it [#FSB201(11-96)] is issued by
First Security Benefit Life Insurance Company of New York, White Plains, NY. T.
Rowe Price refers to the underlying portfolios' investment managers and the
distributors, T. Rowe Price Investment Services, Inc.; T. Rowe Price Insurance
Agency, Inc.; and T. Rowe Price Insurance Agency of Texas, Inc. The Security
Benefit Group of Companies and the T. Rowe Price companies are not affiliated.
The variable annuity may not be available in all states. The contract has
limitations. Call a representative for costs and complete details of the
coverage.
27
<PAGE>
T. ROWE PRICE DISCOUNT BROKERAGE
- ------------------------------------------------------------------------------
DISCOUNT BROKERAGE
A Division of T. Rowe Price Investment Services, Inc., Member NASD/SIPC
This low-cost service gives you the opportunity to easily consolidate all your
investments with one company. Through T. Rowe Price Discount Brokerage, you can
buy and sell individual securities--stocks, bonds, options, and others--at
considerable commission savings over full-service brokers.* We also provide a
wide range of services, including:
Automated Telephone and Computer Services You can enter trades, access quotes,
and review account information 24 hours a day, seven days a week. Any trades
executed through these programs save you an additional 10% on commissions.**
Investor Information A variety of informative reports, such as our Brokerage
Insights series, S&P Market Month newsletter, and select stock reports, can help
you better evaluate economic trends and investment opportunities.
Dividend Reinvestment Service Virtually all stocks held in customer accounts
are eligible for this service, free of charge.
*Based on a February 1997 telephone survey that compared our commission rates
on stock transactions of various sizes with those of other full-service and
discount brokerages. Commission rates will vary based on size and nature of
trades. Services vary by firm. For additional information concerning our
commission rates and services, call 1-800-638-5660.
**Discount applies to our current commission schedule; subject to our $35
minimum commission.
28
<PAGE>
For yield, price, last transaction, current balance, or to conduct transactions,
24 hours, 7 days a week, call Tele*Access(R): 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
[LOGO OF T. ROWE PRICE APPEARS HERE]
T. Rowe Price Investment Services, Inc., Distributor. F58-050 12/31/97
