The Hottest Funds for 2012

Along with losing weight and hitting the gym more often, one of the most common New Year's resolutions typically involves getting one's finances in order. In fact, the end of the year is a great time to re-examine your portfolio and make any needed changes for the months ahead. That means making sure you have the investments that stand the best chance of excelling in the coming year.

If there's one area of the market set to outperform in 2012, it is high-quality, domestic large-cap stocks. After a two-and-a-half-year run, this bull market has matured and is at a point where large-cap stocks typically outperform, if history is any guide. In addition, P/Es for larger companies are much more attractive than those for smaller firms. Therefore, you should make sure your portfolio has adequate coverage in this corner of the market.

In this three-part series, I'll take a closer look at a handful of actively managed large-cap funds that are well suited to capitalize on potential market movements in the upcoming year. I'll look at two winners in three categories: dividend funds, value funds, and growth funds. Consider adding one or more of these funds to your portfolio to make the most of your investments in 2012.

Vanguard Dividend Growth (VDIGX)
Dividend-producing funds have been getting a lot of attention in recent months, and for good reason. Over time, stocks that throw off dividends have tended to outperform those that don't. And given that 2012 is likely to be characterized by continued below-trend economic growth, financially stable blue chips are well suited to thrive in such a challenging environment. Vanguard Dividend Growth looks to invest in companies with established histories of raising dividends over time, thanks to healthy and rising cash flows. You won't find speculative names here, just healthy dividend payers with generally low levels of debt and high returns on equity.

With just shy of 50 holdings, Vanguard Dividend Growth won't be mistaken for a wide-ranging index fund. Rather, manager Don Kilbride focuses on just a handful of names that best meet his criteria. Right now, cash-laden giants such as Microsoft (Nasdaq: MSFT  ) , Johnson & Johnson (NYSE: JNJ  ) , and PepsiCo (NYSE: PEP  ) , all with trailing dividend yields in excess of 3%, are favorites in the portfolio.

Over the past decade, Dividend Growth has posted an annualized 5.3% return, compared with a 3.1% return for the S&P 500 Index and 2.7% for the average large-cap blend fund. That return places the fund in the top 6% of its peer group in that time frame. This isn't a fund that will shine in more speculative environments like 2009 and 2010, but over the long run, it has proved that it can deliver by sticking to its guns. And with a super-low 0.34% expense ratio, Vanguard Dividend Growth is one of the cheapest dividend-focused funds around. This fund is a proven winner for investors looking to beef up the dividend power in their portfolio.

T. Rowe Price Equity Income (PRFDX)
This fund also focuses on identifying financially stable dividend-paying firms while maintaining an equal commitment to long-term capital growth. T. Rowe Price Equity Income has been under the stewardship of manager Brian Rogers, T. Rowe's chairman and chief investment officer, for more than 26 years. That's practically unheard of in today's short-term-focused mutual fund world. In that two-and-a-half-decade time span, Rogers has steered the fund to a solid, market-beating track record. Over the most recent 15-year period, the fund ranks just outside the top quarter of all large-cap value funds with an annualized 6.4% return, versus a 5.4% showing for the S&P 500 Index.

Rogers looks for well-established companies that offer above-average dividends while selling at reasonable valuations. Chevron (NYSE: CVX  ) and ExxonMobil (NYSE: XOM  ) , two of the fund's top holdings, fit this profile perfectly -- cash-rich industry leaders that are sporting strong balance sheets and reasonable dividend yields and selling at P/Es of roughly 10 or less.

While T. Rowe Price Equity Income thrives on finding market-leading dividend payers, the fund also has a penchant for delving into more beaten-down fare such as General Motors (NYSE: GM  ) and Bank of America (NYSE: BAC  ) . The resulting portfolio has a value tilt, although thanks to the fund's hefty $21 billion asset base, results here have tended to be more middle-of-the-road in recent years.

So while this fund definitely won't swing for the fences, it should still provide reasonable exposure to healthy blue-chip dividend-producers and solid long-term returns in consistent, if unspectacular, packaging.

Stay tuned tomorrow for our look at two value-oriented large-cap funds that are uniquely positioned to make the most of 2012's uncertain market.

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Amanda Kish is the Fool's resident fund advisor for the Rule Your Retirement investment newsletter service. At the time of publication, she owned none of the funds or companies mentioned herein. The Motley Fool owns shares of Microsoft, Johnson & Johnson, PepsiCo, and Bank of America. Motley Fool newsletter services have recommended buying shares of Microsoft, Johnson & Johnson, PepsiCo, Chevron, and General Motors, as well as creating a bull call spread position in Microsoft and diagonal call positions in Johnson & Johnson and PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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