The Gabelli Dividend Growth Fund

Transcription

1 The Gabelli Dividend Growth Fund Shareholder Commentary March 31, 2014 Barbara G. Marcin, CFA Portfolio Manager To Our Shareholders, For the quarter ended March 31, 2014, the net asset value ( NAV ) per Class AAA Share of The Gabelli Dividend Growth Fund increased 0.8% compared with the increase of 1.8% for the Standard & Poor s ( S&P ) 500 Index. See page 2 for additional performance information. Introduction The stock indices ended the first quarter little changed, as investors moderated the enthusiasm that helped the market close at new highs last year. The S&P 500 gained 1.8% while the Dow Jones Industrial Average declined (0.2%). As the year started there was widespread optimism that the strength in the economy apparent in the last month of the prior year would continue and we might finally achieve a year with better than 3% growth. However, much of the United States experienced an extremely brutal winter in the first few months, with record breaking snowfalls and low temperatures. Business and school closures were common throughout the winter, as were mass flight cancellations. This extreme weather made it difficult to get a picture of the underlying economic activity. So, it remains to be seen whether the economy will resume the year end strength in the second quarter, or if this year will again be the typical of the mediocre growth which has marked this recovery. According to S&P Dow Jones Indices a record 1,078 companies raised their dividends in the first quarter, beating the previous record set in Dividends remain the one of few if not the only sensible income generating alternatives available to investors starved for yield. Nevertheless, even though dividend payments have risen strongly in the past few years, the payout ratio, which long term historically averaged 52% remains at a low 36%. We expect companies to continue to increase their dividends and improve this payout ratio. Performance The ten industrial sectors which comprise the stocks of the S&P 500 had more widely divergent returns than we have seen over the past year. As the underlying strength of the economy began to be questioned in the first quarter, not surprisingly the strongest performing sectors were those considered defensive, or not dependant on economic growth. The utility sector had the highest total return, just under 10%, and the health care sector was also strong with a return of 5.9%. The weakest two sectors were those that would be most affected by a lack of strength and spending: consumer discretionary and industrials, with returns of 0.5% and 0.1%, respectively.

2 Comparative Results Average Annual Returns through March 31, 2014 (a) Since Inception Quarter 1 Year 5 Year 10 Year (8/26/99) Class AAA (GABBX) % 18.47% 18.37% 7.18% 5.89% S&P 500 Index Lipper Large Cap Value Fund Average Class A (GBCAX) With sales charge (b) (4.96) Class C (GBCCX) With contingent deferred sales charge (c) (0.34) Class I (GBCIX) In the current prospectuses dated April 30, 2014, the expense ratios for Class AAA, A, C, and I Shares are 2.00%, 2.00%, 2.75%, and 1.75%, respectively. Class AAA and Class I Shares do not have a sales charge. The maximum sales charge for Class A Shares and Class C Shares is 5.75% and 1.00%, respectively. (a) Returns represent past performance and do not guarantee future results. Total returns and average annual returns reflect changes in share price, reinvestment of distributions, and are net of expenses. Investment returns and the principal value of an investment will fluctuate. When shares are redeemed, they may be worth more or less than their original cost. Current performance may be lower or higher than the performance data presented. Visit for performance information as of the most recent month end. Returns would have been lower had Gabelli Funds, LLC (the Adviser ) not reimbursed certain expenses of the Fund. The Fund imposes a 2% redemption fee on shares sold or exchanged within seven days after the date of purchase. Performance returns for periods of less than one year are not annualized. Investors should carefully consider the investment objectives, risks, charges, and expenses of the Fund before investing. The prospectuses contain information about these and other matters and should be read carefully before investing. To obtain a prospectus please visit our website at The S&P 500 Index is a market capitalization weighted index of 500 large capitalization stocks commonly used to represent the U.S. equity market. The Lipper Large Cap Value Fund Average reflects the average performance of mutual funds classified in this particular category. Dividends are considered reinvested. You cannot invest directly in an index. The Class AAA Share NAVs are used to calculate performance for the periods prior to the issuance of Class A Shares and Class C Shares on December 31, 2003, and the Class I Shares on June 30, The actual performance of the Class A and Class C Shares would have been lower due to the additional fees and expenses associated with these classes of shares. The actual performance for the Class I Shares would have been higher due to the lower expenses related to this class of shares. (b) Performance results include the effect of the maximum 5.75% sales charge at the beginning of the period. (c) Assuming payment of the 1% maximum contingent deferred sales charge imposed on redemptions made within one year of purchase. We have separated the portfolio manager s commentary from the financial statements and investment portfolio due to corporate governance regulations stipulated by the Sarbanes-Oxley Act of We have done this to ensure that the content of the portfolio manager s commentary is unrestricted. Both the commentary and the financial statements, including the portfolio of investments, are available on our website at 2

3 Several of our larger positions, which comprise 1% or more of the Fund, rose more than 10%, including Halliburton (2.9% of net assets as of March 31, 2014), Eli Lilly (1.6%), Microsoft (2.5%), Waddell and Reed (2.4%), Diebold (no longer held), Vodaphone (1.2%), Great Plains Energy (no longer held), and Nextera Energy (no longer held). The Economy and Markets The cyclical growth in consumer spending has been key to achieving the minimal economic growth that has characterized this recovery, which began in Consumers have been helped by rising house and stock prices, and by a fall in the price of energy over the past two years. However, to continue gains in spending we will need to see an improvement in job creation, which has so far mostly been elusive. We are hopeful that the moderate strength in housing will continue, although affordability has declined with the rise in rates and prices and the new regulatory changes. Europe is now showing some possible signs of improvement. The euro zone job market appears to have stabilized after steep losses last year, although the unemployment rate still stands at 12%. The economy of the euro zone is expected to continue a very slow expansion. In February, pro-russian Crimeans, along with Russian military forces without insignia, began to gradually take control of Crimea. Prime Minister Vladimir Putin conducted a referendum on the question of Crimea joining the Russian Federation to make the case for popular support, and acted quickly to absorb Crimea in a largely violence free takeover. However, this was not recognized by the United States and Europe, and sparked fears that the Ukraine would be next to be absorbed, even as it became immediately clear that none of the developed nations had the stomach for a physical confrontation. It remains to be seen but expectations are that Putin will act further to realize his goal that Russia should regain world influence. So the European Union will have this heightened geopolitical uncertainty on its eastern border over the next year. Signs of a slowdown continued to emerge in China. Its government is dealing with overcapacity and falling prices in real estate and trying to discipline its shadow banking sector. The concern is that the Chinese economy might face a hard landing which could be if growth were to come in under the target of 7.5%. China must come close to this high level of growth in order to create jobs for the 7 million college graduates and 10 million people coming in to cities from the country each year. The government has set a goal of creating 10 million new jobs a year and has been achieving this with massive spending, hoping that this works until the quickly growing consumer economy can help. Although Japan s prime minister jolted Japan s economy back to life last year with his inflation targets and massive monetary and fiscal stimulus, the momentum has faded. It remains to be seen whether the country can enact real reforms to improve the long term anemic growth rate. Optimism for stronger economic growth in our economy is also supported by the energy revolution in the United States, brought about by inventive hydraulic fracturing of rock combined with horizontal drilling. This has led to tremendous oil and gas reserves now available and has boosted production dramatically, leading to an outlook for sustained lower energy prices in the United States. This increase in oil and gas has already fueled job growth in this industry, and also has the benefit of making the United States a more attractive place for corporate investment in plant and equipment. 3

4 The current high level of corporate profits has been achieved with the help of very low interest rates, as companies boosted their earnings with debt refinancing and easy money for both acquisitions and share buyback programs. We estimate about 25% of the earnings growth over the past few years has come from lower interest rates helping in these ways. The contribution to earnings growth that came from falling interest rates is over. We continue to work to find companies that we believe offer good total return to our investors. We appreciate the dependability of income producing equities, and want to invest in those that can grow their earnings and dividends. We will highlight some of these below. Let s Talk Stocks The following are stock specifics on selected holdings of the Fund. Favorable earnings prospects do not necessarily translate into higher stock prices, but they do express a positive trend that we believe will develop over time. Individual securities mentioned are not necessarily representative of the entire portfolio. For the following holdings, the percentage of net assets and their share prices stated in U.S. dollars or U.S. dollar equivalent terms are presented as of March 31, Apple Inc. (4.0%) (AAPL - $ NASDAQ), headquartered in Cupertino, California, is the global leader in personal computers, smartphones, tablets, consumer electronics, digital media content, and related software. The company s long awaited partnership with China Mobile was announced the last week in December. In our view, the opportunity for Apple with China Mobile is significant to the company s revenue and earnings and provides new growth. As the largest phone carrier in the world, China Mobile has 750 million subscribers, which is over 60% of the total subscribers in China. We estimate that Apple will sell over 20 million phones to China Mobile subscribers in We also expect Apple to release a larger iphone in 2014, as this has been popular, is a natural extension of the iphone franchise, and is expected to be popular in China. We remain as comfortable with the company s strategy in positioning its products as we are sure of the value in the company s stock, trading at less than 13 times earnings, a substantial discount to the overall market for a company with tremendous growth in earnings and cash flow ahead of it. We look forward to the company both increasing its dividend that currently provides a 2.2% return, and to the release of exciting new products over the next year. Halliburton Company (2.9%) (HAL - $ NYSE) Halliburton Company, based in Houston, Texas, is a leading provider of services and products to the energy industry related to the exploration, development and production of oil and natural gas. The Company has targeted to reach $6/share in earnings in 2016 (up from $3.05 in 2013) driven by market share gain in the deepwater and mature field markets, improved profitability in both its North American unconventional business and International operations, and sustained share buybacks. In addition, Halliburton plans to reduce capital expenditures and improve working capital efficiency. These initiatives should enable the Company to generate high level of free cash flow. Halliburton has targeted to return about 35% of its operating cash flow to shareholders in dividend and share repurchases, which is twice what it had returned historically. JPMorgan Chase & Co. (2.7% of net assets as of March 31, 2014) (JPM - $ NYSE) is one of the oldest financial institutions in the United States. The firm, with assets of over $2.4 trillion, provides services to millions of consumers, small businesses, and many of the world s largest corporate, institutional, and government clients. The bank is divided into several reporting segments, including investment banking, commercial banking, financial transaction processing, asset management, and private equity. CEO Jamie Dimon is well regarded among corporate leaders and has positioned the company for future growth, despite the recent challenges related to the financial crisis, increased regulations, and low interest rates. 4

5 Merck & Co. Inc. (2.5%) (MRK - $ NYSE), headquartered in Whitehouse Station, New Jersey, is a major international drug and pharmaceutical manufacturing company, providing health solutions through its prescription medicines, vaccines, biologic therapies, animal health, and consumer care products. The company focuses on the research, development, manufacturing, and bringing-to-market of therapeutic and preventative agents and vaccinations for the treatment of human disorders. The Merck Consumer Products arm is well known for its over the counter health products, manufacturing the products sold by brands such as Afrin, Claritin, Coppertone, Dr. Scholl s, MiraLAX, Tinactin, and Zegerid. Merck brings its products to market through sale and distribution to drug wholesalers and retailers, hospitals, government agencies, physicians, physician distributors, veterinarians, managed health care providers, as well as food store chains and mass merchandisers, in the U.S. and worldwide. The company s drug pipeline includes potential new treatments for diseases such as diabetes, cancer, and Alzheimer s disease. On October 1, 2013, Merck announced its global initiative to create a more flexible cost structure and renewed focus on targeting pipeline opportunities. By 2015, the company expects to reduce its headcount by approximately 20%, resulting in annual net cost savings of $2.5 billion. American International Group Inc. (2.4%) (AIG - $ NYSE) is the world s largest insurance organization, with more than eighty-eight million customers worldwide. The firm conducts operations under several subsidiaries and provides property casualty insurance, life insurance, retirement services, mortgage insurance, and aircraft leasing. Over 62,000 employees in more than ninety countries make up the company s global network. After facing significant issues during the financial crisis, the company continues to execute on a turnaround plan that improves the balance sheet and positions the firm for long term growth tied to global demand for insurance products. Consol Energy Inc. (2.2%) (CNX - $ NYSE) is a leading producer of coal and gas in the northeast region of the United States. CNX has significantly transformed its energy supply business segment through the sale of non core assets and the acquisition of premium gas properties with the objective of balancing the decline in demand for and price of coal with the increasing production and use of natural gas as an energy supply. In 2010 it purchased Dominion Resources Appalachian oil and gas properties, and in 2011 formed a strategic partnership with Hess Corporation to explore for and develop oil, liquids, and gas on 200,000 acres of Utica Shale in Ohio. The company has ambitious gas production targets, expecting to double their exploration and production operations over a few year period. Now, 2014 is the year that revenues will bottom out, and it is the first year in a few that the company will grow earnings. We believe that Consol Energy s equity will eventually reflect the sum of the parts value in 2014 as it becomes evident that its coal operations have bottomed out, and investors start to revalue the company as they focus on the growth of its natural gas assets. General Electric Co. (2.1%) (GE - $ NYSE) is an industrial conglomerate based in Fairfield, Connecticut, with leading positions in power, energy, healthcare, and aviation equipment, services, and financing. GE continues to downsize its finance business, GE Capital, outside of commercial and infrastructure lending, allowing for a larger industrials focus and the payment of dividends to the parent. GE recently announced its intention to spin-off its North American consumer finance business, best known for private label credit cards. Over the next three to five years, we expect that GE can grow its earnings per share near 10% annually, and dividends to increase in line with earnings. Drivers will be strong top line growth, led by aircraft engine deliveries, and a company wide effort to reduce SG&A expenses as a percent of sales through the elimination of duplication and simplification at the corporate level. Strong cash flow from the businesses will likely be used to buy back stock and for bolt-on acquisitions. Freeport-McMoRan Copper & Gold, Inc. (1.6%) (FCX - $ NYSE) is one of the largest copper producers in the world. The company s flagship Grasberg mine in Indonesia hosts one of the world s richest copper and gold deposits. Freeport also has a large mining presence in the United States through its ownership of large 5

6 open pit copper operations in Arizona. The company acquired Plains Exploration last year, giving it exposure to oil and gas exploration and development properties through its ownership of both onshore and shallow water Gulf of Mexico assets. The company took on debt through the acquisition, and has now committed to pay down this debt as its first priority. Once the debt level is reduced, Freeport s cash flow generation capability will lend itself to the potential for higher future dividend payments. Mondelēz International Inc. (1.2%) (MDLZ - $ NASDAQ) headquartered in Deerfield, Illinois is the new name of Kraft Foods Inc. following the tax-free spin-off to shareholders of the North American grocery company, Kraft Foods Group Inc. (KRFT). On October 1, 2012, shareholders received one share of Mondelēz and onethird share in Kraft Foods Group (KRFT) for every share of Kraft Foods Inc. owned. Post spin, approximately 75% of Mondelēz s revenue is generated from the snacking business, which includes leading brands such as Oreo, LU and Ritz biscuits, Trident gum and Cadbury and Milka chocolates, while the remaining 25% consists of the international packaged food business, primarily coffee and powdered beverages. The company is focused on accelerating growth in the faster growing snack business, building upon its international scale and improving margins. In 2014, Mondelēz is expected to generate over $35.8 billion of revenue, $5.7 billion of EBITDA and earnings of $1.70 per share. Looking Ahead Economic fundamentals in the U.S. look better than the other large developed nations. Our economy has been helped to a firmer footing by the recovery in our housing and auto sectors. Manufacturing activity is not strong but is firm enough to be supportive of economic expansion. Growth in sales and earnings is more important than ever as the stock market value has raced past the growth in earnings. As we start in on the earnings reports for the first quarter, expectations are low. Last year was the second year in which corporate earnings rose a weak 4% - 5%, and unless the economy accelerates in the second half this will be the third. So the market gains last year were due almost entirely to higher multiples placed on earnings and cash flow. This slowing earnings growth has in the last two years comes after growth rates of 33% in 2010 and 18% in The S&P 500 started out the year with a trailing price earnings multiple of about 15 times, about in line with the long term average. It ended the year at 17 times clearly above the long term average. Of course, the market delivers its long term average price returns of about 9% - 10% in a very uneven way, and the price earnings multiple is not correlated to market returns on a shorter term time frame. However, it is relevant to the return that will be earned over the next several years. Hopefully with the bad weather behind us we will see our economy accelerate in the second quarter to a firmer growth rate and improve corporate profit growth above the mid single digit range that is currently expected. We invest in companies, some of which are noted in our Performance and Let s Talk Stocks sections, to participate in the growth of their earnings and cash flow. We look for those companies that we believe will continue to return cash flow to shareholders through reinvestment in their businesses and higher share price valuation, as well as by growing their dividends. We look to build a steady component of not only current return from dividend yields, but also a rising dividend payout from most of our portfolio in order to contribute to the performance of the Fund. April 22,

7 Apple Inc. 4.0% Halliburton Co. 2.9% Honeywell International Inc. 2.7% International Paper Co. 2.7% JPMorgan Chase & Co. 2.7% Top Ten Holdings (Percent of Net Assets) March 31, 2014 CME Group Inc. 2.6% Johnson & Johnson 2.6% Microsoft Corp. 2.5% Merck & Co. Inc. 2.5% Waddell & Reed Financial Inc. 2.4% Note: The views expressed in this Shareholder Commentary reflect those of the Portfolio Manager only through the end of the period stated in this Shareholder Commentary. The Portfolio Manager s views are subject to change at any time based on market and other conditions. The information in this Portfolio Manager s Shareholder Commentary represents the opinions of the individual Portfolio Manager and is not intended to be a forecast of future events, a guarantee of future results, or investment advice. Views expressed are those of the Portfolio Manager and may differ from those of other portfolio managers or of the Firm as a whole. This Shareholder Commentary does not constitute an offer of any transaction in any securities. Any recommendation contained herein may not be suitable for all investors. Information contained in this Shareholder Commentary has been obtained from sources we believe to be reliable, but cannot be guaranteed. Minimum Initial Investment $1,000 The Fund s minimum initial investment for regular accounts is $1,000. There are no subsequent investment minimums. No initial minimum is required for those establishing an Automatic Investment Plan. Additionally, the Fund and other Gabelli/GAMCO Funds are available through the no-transaction fee programs at many major brokerage firms. The Fund imposes a 2% redemption fee on shares sold or exchanged within seven days after the date of purchase. See the prospectus for more details. Please visit us on the Internet. Our homepage at contains information about GAMCO Investors, Inc., the Gabelli/GAMCO Mutual Funds, IRAs, 401(k)s, current and historical quarterly reports, closing prices, and other current news. We welcome your comments and questions via at info@gabelli.com. The Fund s daily net asset value is available in the financial press and each evening after 7:00 PM (Eastern Time) by calling 800-GABELLI ( ). The Fund s Nasdaq symbol is GABBX for Class AAA Shares. Please call us during the business day, between 8:00 AM 7:00 PM (Eastern Time), for further information. You may sign up for our alerts at and receive early notice of quarterly report availability, news events, media sightings, and mutual fund prices and performance. 7

8 e-delivery We are pleased to offer electronic delivery of Gabelli fund documents. Direct shareholders of our mutual funds can elect to receive their Annual and Semiannual Reports, Manager Commentaries, and Prospectuses via e-delivery. For more information or to sign up for e-delivery, please visit our website at Multi-Class Shares Class AAA Shares are no-load shares offered directly through selected broker/dealers. Class A and Class C Shares are targeted to the needs of investors who seek advice through financial consultants. Class I Shares are available directly through the Fund s distributor or brokers that have entered into selling agreements specifically with respect to Class I Shares. The Board of Trustees determined that expanding the types of Fund shares available through various distribution options will enhance the ability of the Fund to attract additional investors. 8

9 Gabelli/GAMCO Funds and Your Personal Privacy Who are we? The Gabelli/GAMCO Funds are investment companies registered with the Securities and Exchange Commission under the Investment Company Act of We are managed by Gabelli Funds, LLC, which is affiliated with GAMCO Investors, Inc. GAMCO Investors, Inc. is a publicly held company that has subsidiaries that provide investment advisory or brokerage services for a variety of clients. What kind of non-public information do we collect about you if you become a fund shareholder? If you apply to open an account directly with us, you will be giving us some non-public information about yourself. The non-public information we collect about you is: Information you give us on your application form. This could include your name, address, telephone number, social security number, bank account number, and other information. Information about your transactions with us, any transactions with our affiliates, and transactions with the entities we hire to provide services to you. This would include information about the shares that you buy or redeem. If we hire someone else to provide services like a transfer agent we will also have information about the transactions that you conduct through them. What information do we disclose and to whom do we disclose it? We do not disclose any non-public personal information about our customers or former customers to anyone other than our affiliates, our service providers who need to know such information, and as otherwise permitted by law. If you want to find out what the law permits, you can read the privacy rules adopted by the Securities and Exchange Commission. They are in volume 17 of the Code of Federal Regulations, Part 248. The Commission often posts information about its regulations on its website, What do we do to protect your personal information? We restrict access to non-public personal information about you to the people who need to know that information in order to provide services to you or the fund and to ensure that we are complying with the laws governing the securities business. We maintain physical, electronic, and procedural safeguards to keep your personal information confidential.

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11 THE GABELLI DIVIDEND GROWTH FUND One Corporate Center Rye, NY Portfolio Manager Biography Barbara G. Marcin, CFA, joined GAMCO Investors, Inc. in 1999 and currently serves as a portfolio manager of Gabelli Funds, LLC and manages several funds within the Gabelli/GAMCO Funds Complex. Prior to joining GAMCO, Ms. Marcin was head of value investments at Citibank Global Asset Management. Ms. Marcin graduated with Distinction as an Echols Scholar from the University of Virginia and holds an MBA degree from Harvard University s Graduate School of Business.

12 THE GABELLI DIVIDEND GROWTH FUND One Corporate Center Rye, NY t 800-GABELLI ( ) f e info@gabelli.com GABELLI.COM Net Asset Value per share available daily by calling 800-GABELLI after 7:00 P.M. BOARD OF TRUSTEES Mario J. Gabelli, CFA Chairman and Chief Executive Officer, GAMCO Investors, Inc. Anthony J. Colavita President, Anthony J. Colavita, P.C. Vincent D. Enright Former Senior Vice President and Chief Financial Officer, KeySpan Corp. Mary E. Hauck Former Senior Portfolio Manager, Gabelli-O Connor Fixed Income Mutual Fund Management Co. Kuni Nakamura President, Advanced Polymer, Inc. Werner J. Roeder, MD Medical Director, Lawrence Hospital OFFICERS Bruce N. Alpert President Andrea R. Mango Secretary Agnes Mullady Treasurer Richard J. Walz Chief Compliance Officer DISTRIBUTOR G.distributors, LLC CUSTODIAN, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT State Street Bank and Trust Company LEGAL COUNSEL Skadden, Arps, Slate, Meagher & Flom LLP THE GABELLI DIVIDEND GROWTH FUND Shareholder Commentary March 31, 2014 This report is submitted for the general information of the shareholders of The Gabelli Dividend Growth Fund. It is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus. GAB402Q114SC

13 The Gabelli Dividend Growth Fund First Quarter Report March 31, 2014 To Our Shareholders, Barbara G. Marcin, CFA Portfolio Manager For the quarter ended March 31, 2014, the net asset value ( NAV ) per Class AAA Share of The Gabelli Dividend Growth Fund increased 0.8% compared with the increase of 1.8% for the Standard & Poor s ( S&P ) 500 Index. See below for additional performance information. Enclosed is the schedule of investments as of March 31, Comparative Results Average Annual Returns through March 31, 2014 (a) (Unaudited) Since Inception Quarter 1 Year 5 Year 10 Year (8/26/99) Class AAA (GABBX) % 18.47% 18.37% 7.18% 5.89% S&P 500 Index Lipper Large Cap Value Fund Average Class A (GBCAX) With sales charge (b)... (4.96) Class C (GBCCX) With contingent deferred sales charge (c).... (0.34) Class I (GBCIX) In the current prospectuses dated April 30, 2014, the expense ratios for Class AAA, A, C, and I Shares are 2.00%, 2.00%, 2.75%, and 1.75%, respectively. Class AAA and Class I Shares do not have a sales charge. The maximum sales charge for Class A Shares and Class C Shares is 5.75% and 1.00%, respectively. (a) Returns represent past performance and do not guarantee future results. Total returns and average annual returns reflect changes in share price, reinvestment of distributions, and are net of expenses. Investment returns and the principal value of an investment will fluctuate. When shares are redeemed, they may be worth more or less than their original cost. Current performance may be lower or higher than the performance data presented. Visit for performance information as of the most recent month end. Returns would have been lower had Gabelli Funds, LLC (the Adviser ) not reimbursed certain expenses of the Fund. The Fund imposes a 2% redemption fee on shares sold or exchanged within seven days after the date of purchase. Performance returns for periods of less than one year are not annualized. Investors should carefully consider the investment objectives, risks, charges, and expenses of the Fund before investing. The prospectuses contain information about these and other matters and should be read carefully before investing. To obtain a prospectus please visit our website at The S&P 500 Index is a market capitalization weighted index of 500 large capitalization stocks commonly used to represent the U.S. equity market. The Lipper Large Cap Value Fund Average reflects the average performance of mutual funds classified in this particular category. Dividends are considered reinvested. You cannot invest directly in an index. The Class AAA Share NAVs are used to calculate performance for the periods prior to the issuance of Class A Shares and Class C Shares on December 31, 2003, and the Class I Shares on June 30, 2004.The actual performance of the Class A and Class C Shares would have been lower due to the additional fees and expenses associated with these classes of shares. The actual performance for the Class I Shares would have been higher due to the lower expenses related to this class of shares. (b) Performance results include the effect of the maximum 5.75% sales charge at the beginning of the period. (c) Assuming payment of the 1% maximum contingent deferred sales charge imposed on redemptions made within one year of purchase.

14 The Gabelli Dividend Growth Fund Schedule of Investments March 31, 2014 (Unaudited) Market Shares Value COMMON STOCKS 92.3% Agriculture 0.3% 1,000 Monsanto Co.... $ 113,770 Automotive 3.0% 20,000 General Motors Co ,400 10,000 Navistar International Corp ,700 1,027,100 Cable and Satellite 1.0% 2,500 Time Warner Cable Inc ,950 Communications Equipment 2.2% 15,300 Cisco Systems Inc ,873 5,000 QUALCOMM Inc , ,173 Computer Software and Services 6.5% 2,500 Apple Inc.... 1,341,850 21,000 Microsoft Corp ,790 2,202,640 Consumer Services 0.2% 2,500 The ADT Corp ,875 Diversified Industrial 4.9% 28,000 General Electric Co ,920 10,000 Honeywell International Inc ,600 1,652,520 Electronics 3.2% 21,600 Intel Corp ,496 10,800 Texas Instruments Inc ,220 1,066,716 Energy 11.1% 2,000 Apache Corp ,900 2,700 Chevron Corp ,057 11,050 ConocoPhillips ,367 19,000 CONSOL Energy Inc ,050 6,000 Devon Energy Corp ,580 6,000 Exxon Mobil Corp ,080 7,525 Phillips ,877 6,000 Statoil ASA, ADR ,320 3,760,231 Energy Services 3.6% 16,500 Halliburton Co ,685 6,100 Transocean Ltd ,174 1,223,859 Entertainment 2.1% 9,000 The Walt Disney Co ,630 Environmental Services 1.3% 10,000 Waste Management Inc ,700 Market Shares Value Financial Services 16.7% 4,500 American Express Co... $ 405,135 16,000 American International Group Inc ,160 16,000 Citigroup Inc ,600 12,000 CME Group Inc ,120 15,000 JPMorgan Chase & Co ,650 17,000 Morgan Stanley ,890 10,000 The Blackstone Group LP ,500 5,000 U.S. Bancorp ,300 11,000 Waddell & Reed Financial Inc., Cl. A ,820 5,652,175 Food and Beverage 3.7% 3,000 Diageo plc, ADR ,770 12,000 Mondelēz International Inc., Cl. A ,600 5,400 PepsiCo Inc ,900 1,239,270 Health Care 15.7% 10,487 Bristol-Myers Squibb Co ,800 5,400 Covidien plc ,764 9,000 Eli Lilly & Co ,740 5,000 Gilead Sciences Inc ,300 9,000 Johnson & Johnson ,070 14,950 Merck & Co. Inc ,712 18,575 Pfizer Inc ,629 8,000 Sanofi, ADR ,240 25,854 Zoetis Inc ,215 5,322,470 Machinery 2.0% 18,000 Xylem Inc ,560 Metals and Mining 2.4% 16,000 Freeport-McMoRan Copper & Gold Inc ,120 12,000 Newmont Mining Corp , ,400 Paper and Forest Products 2.7% 20,000 International Paper Co ,600 Retail 1.9% 24,000 Best Buy Co. Inc ,840 Specialty Chemicals 4.0% 10,000 E. I. du Pont de Nemours and Co ,000 14,000 The Dow Chemical Co ,260 1,351,260 Telecommunications 2.6% 10,260 Verizon Communications Inc ,068 10,909 Vodafone Group plc, ADR , ,628 See accompanying notes to schedule of investments. 2

15 The Gabelli Dividend Growth Fund Schedule of Investments (Continued) March 31, 2014 (Unaudited) Market Shares Value COMMON STOCKS (Continued) Water 1.2% 9,000 American Water Works Co. Inc.... $ 408,600 TOTAL COMMON STOCKS... 31,223,967 Principal Amount U.S. GOVERNMENT OBLIGATIONS 7.7% $ 2,616,000 U.S. Treasury Bills, 0.035% to 0.095%, 04/17/14 to 09/11/ ,615,874 TOTAL INVESTMENTS 100.0% (Cost $24,676,690)... $33,839,841 Aggregate tax cost... $24,766,006 Gross unrealized appreciation... $ 9,632,630 Gross unrealized depreciation... (558,795) Net unrealized appreciation/depreciation... $ 9,073,835 Non-income producing security. Represents annualized yield at date of purchase. ADR American Depositary Receipt See accompanying notes to schedule of investments. 3

16 The Gabelli Dividend Growth Fund Notes to Schedule of Investments (Unaudited) The Fund s schedule of investments is prepared in accordance with U.S. Generally Accepted Accounting Principles ( GAAP ), which may require the use of management estimates and assumptions. Actual results could differ from those estimates. The following is a summary of significant accounting policies followed by the Fund in the preparation of its schedule of investments. Security Valuation. Portfolio securities listed or traded on a nationally recognized securities exchange or traded in the U.S. over-the-counter market for which market quotations are readily available are valued at the last quoted sale price or a market s official closing price as of the close of business on the day the securities are being valued. If there were no sales that day, the security is valued at the average of the closing bid and asked prices or, if there were no asked prices quoted on that day, then the security is valued at the closing bid price on that day. If no bid or asked prices are quoted on such day, the security is valued at the most recently available price or, if the Board of Trustees (the Board ) so determines, by such other method as the Board shall determine in good faith to reflect its fair market value. Portfolio securities traded on more than one national securities exchange or market are valued according to the broadest and most representative market, as determined by Gabelli Funds, LLC (the Adviser ). Portfolio securities primarily traded on a foreign market are generally valued at the preceding closing values of such securities on the relevant market, but may be fair valued pursuant to procedures established by the Board if market conditions change significantly after the close of the foreign market, but prior to the close of business on the day the securities are being valued. Debt instruments with remaining maturities of sixty days or less that are not credit impaired are valued at amortized cost, unless the Board determines such amount does not reflect the securities fair value, in which case these securities will be fair valued as determined by the Board. Debt instruments having a maturity greater than sixty days for which market quotations are readily available are valued at the average of the latest bid and asked prices. If there were no asked prices quoted on such day, the security is valued using the closing bid price. U.S. government obligations with maturities greater than sixty days are normally valued using a model that incorporates market observable data such as reported sales of similar securities, broker quotes, yields, bids, offers, and reference data. Certain securities are valued principally using dealer quotations. Securities and assets for which market quotations are not readily available are fair valued as determined by the Board. Fair valuation methodologies and procedures may include, but are not limited to: analysis and review of available financial and non-financial information about the company; comparisons with the valuation and changes in valuation of similar securities, including a comparison of foreign securities with the equivalent U.S. dollar value American Depositary Receipt securities at the close of the U.S. exchange; and evaluation of any other information that could be indicative of the value of the security. The inputs and valuation techniques used to measure fair value of the Fund s investments are summarized into three levels as described in the hierarchy below: Level 1 quoted prices in active markets for identical securities; Level 2 other significant observable inputs (including quoted prices for similar securities, interest rates, prepayment speeds, credit risk, etc.); and Level 3 significant unobservable inputs (including the Board s determinations as to the fair value of investments). 4

17 The Gabelli Dividend Growth Fund Notes to Schedule of Investments (Unaudited) (Continued) A financial instrument s level within the fair value hierarchy is based on the lowest level of any input both individually and in the aggregate that is significant to the fair value measurement. The inputs or methodology used for valuing securities are not necessarily an indication of the risk associated with investing in those securities. The summary of the Fund s investments in securities by inputs used to value the Fund s investments as of March 31, 2014 is as follows: Investments in Securities (Market Value) Valuation Inputs* Assets Level 1 - Quoted Prices $31,223,967 Level2-OtherSignificant Observable Inputs 2,615,874 Total $33,839,841 * Portfolio holdings designated in Level 1 and Level 2 are disclosed individually in the Schedule of Investments ( SOI ). Please refer to the SOI for the industry classifications of these portfolio holdings. Level 1 consists of common stocks. Level 2 consists of U.S. Government Obligations. The Fund did not have transfers between Level 1 and Level 2 during the period ended March 31, The Fund s policy is to recognize transfers among Levels as of the beginning of the reporting period. There were no Level 3 investments held at March 31, 2014 or December 31, Additional Information to Evaluate Qualitative Information. General. The Fund uses recognized industry pricing services approved by the Board and unaffiliated with the Adviser to value most of its securities, and uses broker quotes provided by market makers of securities not valued by these and other recognized pricing sources. Several different pricing feeds are received to value domestic equity securities, international equity securities, preferred equity securities, and fixed income securities. The data within these feeds is ultimately sourced from major stock exchanges and trading systems where these securities trade. The prices supplied by external sources are checked by obtaining quotations or actual transaction prices from market participants. If a price obtained from the pricing source is deemed unreliable, prices will be sought from another pricing service or from a broker/dealer that trades that security or similar securities. Fair Valuation. Fair valued securities may be common and preferred equities, warrants, options, rights, and fixed income obligations. Where appropriate, Level 3 securities are those for which market quotations are not available, such as securities not traded for several days, or for which current bids are not available, or which are restricted as to transfer. Among the factors to be considered to fair value a security are recent prices of comparable securities that are publicly traded, reliable prices of securities not publicly traded, the use of valuation models, current analyst reports, valuing the income or cash flow of the issuer, or cost if the preceding factors do not apply. The circumstances of Level 3 securities are frequently monitored to determine if fair valuation measures continue to apply. The Adviser reports quarterly to the Board the results of the application of fair valuation policies and procedures. These include back testing the prices realized in subsequent trades of these fair valued securities to fair values previously recognized. Foreign Securities. The Fund may directly purchase securities of foreign issuers. Investing in securities of foreign issuers involves special risks not typically associated with investing in securities of U.S. issuers. The 5

18 The Gabelli Dividend Growth Fund Notes to Schedule of Investments (Unaudited) (Continued) risks include possible revaluation of currencies, the inability to repatriate funds, less complete financial information about companies, and possible future adverse political and economic developments. Moreover, securities of many foreign issuers and their markets may be less liquid and their prices more volatile than securities of comparable U.S. issuers. Foreign Taxes. The Fund may be subject to foreign taxes on income, gains on investments, or currency repatriation, a portion of which may be recoverable. The Fund will accrue such taxes and recoveries as applicable, based upon its current interpretation of tax rules and regulations that exist in the markets in which it invests. Tax Information. The Fund intends to continue to qualify as a regulated investment company under Subchapter M of the Internal Revenue Code of 1986, as amended. Under the Regulated Investment Company Modernization Act of 2010, the Fund is permitted to carry forward for an unlimited period capital losses incurred. As a result of the rule, post-enactment capital losses that are carried forward will retain their character as either short term or long term capital losses. 6

19 THE GABELLI DIVIDEND GROWTH FUND One Corporate Center Rye, NY Portfolio Manager Biography Barbara G. Marcin, CFA, joined GAMCO Investors, Inc. in 1999 and currently serves as a portfolio manager of Gabelli Funds, LLC and manages several funds within the Gabelli/GAMCO Funds Complex. Prior to joining GAMCO, Ms. Marcin was head of value investments at Citibank Global Asset Management. Ms. Marcin graduated with Distinction as an Echols Scholar from the University of Virginia and holds an MBA degree from Harvard University s Graduate School of Business. We have separated the portfolio manager s commentary from the financial statements and investment portfolio due to corporate governance regulations stipulated by the Sarbanes-Oxley Act of We have done this to ensure that the content of the portfolio manager s commentary is unrestricted. Both the commentary and the financial statements, including the portfolio of investments, will be available on our website at

20 THE GABELLI DIVIDEND GROWTH FUND One Corporate Center Rye, New York t 800-GABELLI ( ) f e info@gabelli.com GABELLI.COM Net Asset Value per share available daily by calling 800-GABELLI after 7:00 P.M. BOARD OF TRUSTEES Mario J. Gabelli, CFA Chairman and Chief Executive Officer, GAMCO Investors, Inc. Anthony J. Colavita President, Anthony J. Colavita, P.C. Vincent D. Enright Former Senior Vice President and Chief Financial Officer, KeySpan Corp. Mary E. Hauck Former Senior Portfolio Manager, Gabelli-O' Connor Fixed Income Mutual Fund Management Co. Kuni Nakamura President, Advanced Polymer, Inc. Werner J. Roeder, MD Medical Director, Lawrence Hospital OFFICERS Bruce N. Alpert President Andrea R. Mango Secretary Agnes Mullady Treasurer Richard J. Walz Chief Compliance Officer DISTRIBUTOR G.distributors, LLC CUSTODIAN, TRANSFER AGENT, AND DIVIDEND DISBURSING AGENT State Street Bank and Trust Company LEGAL COUNSEL Skadden, Arps, Slate, Meagher & Flom LLP THE GABELLI DIVIDEND GROWTH FUND First Quarter Report March 31, 2014 This report is submitted for the general information of the shareholders of The Gabelli Dividend Growth Fund. It is not authorized for distribution to prospective investors unless preceded or accompanied by an effective prospectus. GAB402Q114QR