T. Rowe Price Has Increased Its Dividend for 40 Consecutive Years and Yields 4.4%. Is the Payout a Bargain or a Value Trap?

Investors generally agree that an undervalued stock is a better buy than an overvalued one. And, for income investors, a higher dividend yield is better than a lower one. Not every cheap dividend payer with a big yield, however, is necessarily worth buying. Sometimes cheap stocks are cheap for a reason.

That's the conundrum anyone holding or eyeing a stake in mutual fund manager T. Rowe Price (NASDAQ: TROW) is facing right now. The stock's dirt cheap at a forward-looking price-to-earnings ratio of less than 12, and its solid forward-looking dividend yield of 4.4% is backed up by 40 years of uninterrupted dividend growth. The fact that the stock hasn't made any net gains since the middle of 2022, however, is tough to ignore.

Is this investors' warning that TROW is nothing more than a value trap? Yes. But that doesn't mean the crowd is right.

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T. Rowe Price's price performance is not quite what it looks like

A value trap is a technically cheap stock, but one not likely to recover just because the underlying company is fundamentally flawed for one reason or another. One of these more common reasons is a deteriorating business, for internal or external reasons. Investors may also fear that a dividend is in jeopardy.

It's not always clear when these factors are at work, and investment management outfit T. Rowe Price is no exception. What is clear, though, is that investors have been chasing individual AI stocks since early 2023, dialing back interest in traditional mutual funds.

Too many investors jumped to conclusions about the fund industry in general -- and T. Rowe Price in particular -- based on faulty assumptions. The fact is, this company has continued to gradually expand (on a net basis) its total fee-bearing assets under management, from just over $1.3 trillion as of mid-2022 to $1.7 trillion in Q1 of this year.

No, that doesn't keep pace with overall market growth during this stretch, as measured by the S&P 500. It does, however, align with the S&P 500's growth during this period when not including the so-called "Magnificent Seven" stocks that T. Rowe Price had no reason to jump on ... for itself or its customers.

Given the backdrop, this investment management outfit has grown about as much as you'd expect since mid-2022. It's just that too few investors noticed, or cared to look, distracted by the artificial intelligence revolution.

Not a short-term trade

The good news is that the AI mania that's fueling rallies from a small handful of huge stocks will finally cool off, and the market will ease back to long-term norms. The bad news is, when that might actually happen isn't clear.

It will eventually happen, though, and when it does, don't be surprised to see rekindled interest in traditional mutual funds reaccelerate T. Rowe Price's asset growth. More than that, when it happens, don't be surprised to see debt-free, reliable dividend payers like this one find favor with defensive-minded investors again. This eventual potential makes the 4.4% yield that newcomers can plug into here and now a bargain ... not a value trap.

Just bear in mind this stock is still best utilized as a long-term value and income holding.

James Brumley has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends T. Rowe Price Group. The Motley Fool has a disclosure policy.