UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-CSR
CERTIFIED SHAREHOLDER REPORT OF REGISTERED
MANAGEMENT INVESTMENT COMPANIES
Investment Company Act file number: 811-03128
Morgan Stanley Dividend Growth Securities Inc.
(Exact name of registrant as specified in charter)
1221 Avenue of the Americas, New York, New York 10020
(Address of principal executive offices) (Zip code)
Ronald E. Robison
1221 Avenue of the Americas, New York, New York 10020
(Name and address of agent for service)
Registrant's telephone number, including area code: 212-762-4000
Date of fiscal year end: February 28, 2005
Date of reporting period: August 31, 2004
Item 1 - Report to Shareholders
Welcome, Shareholder:
In this report, you'll learn about how your investment in Morgan Stanley
Dividend Growth Securities Inc. performed during the semiannual period. The
portfolio management team will provide an overview of the market climate, and
discuss some of the factors that helped or hindered performance during the
reporting period. In addition, this report includes the Fund's financial
statements and a list of Fund investments, as well as other information.
This material must be preceded or accompanied by a prospectus for the fund being
offered. Market forecasts provided in this report may not necessarily come to
pass. There is no assurance that the Fund will achieve its investment objective.
The Fund is subject to market risk, which is the possibility that the market
values of securities owned by the fund will decline and, therefore, the value of
the fund shares may be less than what you paid for them. Accordingly, you can
lose money investing in this Fund.
FUND REPORT
For the six-month period ended August 31, 2004
TOTAL RETURN FOR THE SIX-MONTH PERIOD ENDED AUGUST 31, 2004
<Table>
<Caption>
LIPPER LIPPER
S&P LARGE-CAP LARGE-CAP
500 CORE FUNDS VALUE FUNDS
CLASS A CLASS B CLASS C CLASS D INDEX(1) INDEX(2) INDEX(3)
-1.97% -1.99% -2.35% -1.85% -2.74% -3.83% -1.86%
</Table>
The performance of the Fund's four share classes varies because each has
different expenses. The Fund's total return figures assume the reinvestment of
all distributions but do not reflect the deduction of any applicable sales
charges. Such costs would lower performance. Past performance is no guarantee of
future results. See Performance Summary for standardized performance
information.
MARKET CONDITIONS
The economy showed signs of strength during the first half of fiscal year 2004,
albeit at a slowing rate. Investors remained cautious over the potential
negative impact of rapidly rising interest rates. Fears of oil supply
disruptions, as well as forecasts of a "hard landing" in China and its effect on
the global economy, continued to weigh on market sentiment. Consequently, a
pullback ensued in the equity markets. The Federal Reserve Board's Open Market
Committee raised interest rates by 0.25 percent at its June meeting, indicating
that such tightening would continue at a "measured pace." In light of an
emerging soft patch in the economic data, the market moved in a downward
trajectory through July and August. This, however, did not deter the Federal
Reserve from its bias toward rate tightening and at its meeting in August it
implemented another 0.25 percent interest-rate increase.
Energy stocks were the strongest performers during the period as record high oil
prices created strong earnings and cash flows. Strong oil prices had the
opposite effect on the consumer discretionary sector, however, as high energy
costs negatively affected consumers' budgets. Utilities, one of the more
interest-rate-sensitive sectors, performed well, because of a perception that
high oil prices were going to keep the Federal Reserve on hold for longer. Large
index constituents raised their dividends and had strong earnings during the
second quarter. Information technology stocks, led by semiconductor companies,
were weak during the period. Weak demand trends led to inventory buildups and
margin compression for many semiconductor companies, thus casting a bearish tone
over information technology issues in general.
PERFORMANCE ANALYSIS
Morgan Stanley Dividend Growth Securities Inc. outperformed both the S&P 500
Index and the Lipper Large-Cap Core Funds Index but underperformed the Lipper
Large-Cap Value Funds Index for the six months ended August 31, 2004. (Class D
of the Fund did slightly outperform the Lipper Large-Cap Value Funds Index.)
During this period the Fund focused on companies with an ability to manage
through the economic deceleration that might result from rising interest rates
or oil shocks. The managers made an effort to scale out of more cyclical sectors
to find companies with better downside protection, through improved cash flow
yield or dividend growth, than the overall market. The Fund's outperformance
over these
2
six months was driven largely by its weightings in the energy and technology
sectors and stock selection within the consumer discretionary sector. An
overweighted position in the energy sector compared to the S&P 500 helped the
Fund, as strong oil prices prevailed throughout the period. An underweighted
position in technology relative to the benchmark also served as a positive
driver of performance, because this sector underperformed the market as a result
of deteriorating demand trends and sector overcapacity. Within the consumer
discretionary sector stock selection was positive, as a low absolute level of
interest rates led to healthy consumer spending trends that benefited the
sector.
Several of the Fund's positions served as a drag on performance for the period.
An overweighting in basic materials compared to the S&P 500 hurt the Fund, as
demonstrated by that sector's underperformance. Although supply and demand
fundamentals within the sector held steady, an overreaction to a perceived
slowdown in China hurt stock performance. Stock selection within the financials
sector further hampered performance. Although valuations had been attractive in
this sector, the anticipated slowdown of the fixed-income markets after interest
rates rose but before merger and acquisition activity accelerated led to a weak
first half. Similarly, stock selection within the health-care sector was
detrimental, largely as a result of an emphasis on big pharmaceutical names.
Increased competition from generic drug producers and fears of increasing
regulatory pressure dampened these stocks' performance for the period.
INVESTMENT STRATEGY
THE FUND WILL NORMALLY INVEST AT LEAST 80 PERCENT OF ITS ASSETS IN COMMON STOCKS
OF COMPANIES WITH A RECORD OF PAYING DIVIDENDS AND THE POTENTIAL FOR INCREASING
DIVIDENDS. THE FUND'S "INVESTMENT MANAGER," MORGAN STANLEY INVESTMENT ADVISORS
INC., INITIALLY EMPLOYS A QUANTITATIVE SCREENING PROCESS IN AN ATTEMPT TO
IDENTIFY A NUMBER OF COMMON STOCKS THAT ARE UNDERVALUED AND THAT HAVE A RECORD
OF PAYING DIVIDENDS. THE INVESTMENT MANAGER THEN APPLIES QUALITATIVE ANALYSIS TO
DETERMINE WHICH STOCKS IT BELIEVES HAVE THE POTENTIAL TO INCREASE DIVIDENDS AND,
FINALLY, TO DETERMINE WHETHER ANY OF THE STOCKS SHOULD BE ADDED TO OR SOLD FROM
THE FUND'S PORTFOLIO.
FOR MORE INFORMATION ABOUT PORTFOLIO HOLDINGS
EACH MORGAN STANLEY FUND PROVIDES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS IN
ITS SEMIANNUAL AND ANNUAL REPORTS WITHIN 60 DAYS OF THE END OF THE FUND'S SECOND
AND FOURTH FISCAL QUARTERS BY FILING THE SCHEDULE ELECTRONICALLY WITH THE
SECURITIES AND EXCHANGE COMMISSION (SEC). THE SEMIANNUAL REPORTS ARE FILED ON
FORM N-CSRS AND THE ANNUAL REPORTS ARE FILED ON FORM N-CSR. MORGAN STANLEY ALSO
DELIVERS THE SEMIANNUAL AND ANNUAL REPORTS TO FUND SHAREHOLDERS AND MAKES THESE
REPORTS AVAILABLE ON ITS PUBLIC WEB SITE, WWW.MORGANSTANLEY.COM. EACH MORGAN
STANLEY FUND ALSO FILES A COMPLETE SCHEDULE OF PORTFOLIO HOLDINGS WITH THE SEC
FOR THE FUND'S FIRST AND THIRD FISCAL QUARTERS ON FORM N-Q. MORGAN STANLEY DOES
NOT DELIVER THE REPORTS FOR THE FIRST AND THIRD FISCAL QUARTERS TO SHAREHOLDERS,
NOR ARE THE REPORTS POSTED TO THE MORGAN STANLEY PUBLIC WEB SITE. YOU MAY,
HOWEVER, OBTAIN THE FORM N-Q FILINGS (AS WELL AS THE FORM N-CSR AND N-CSRS
FILINGS) BY ACCESSING THE SEC'S WEB SITE,
3
<Table>
<Caption>
TOP 10 HOLDINGS
United Technologies Corp. 3.7%
3M Co. 3.2
Microsoft Corp. 3.1
Target Corp. 3.0
Bank of America Corp. 2.9
Dow Chemical Co. (The) 2.8
Home Depot, Inc. (The) 2.7
Exxon Mobil Corp. 2.7
Pfizer, Inc. 2.7
PepsiCo, Inc. 2.7
</Table>
<Table>
<Caption>
TOP FIVE INDUSTRIES
Industrial Conglomerates 9.4%
Pharmaceuticals: Major 6.8
Integrated Oil 6.6
Household/Personal Care 5.3
Major Banks 5.0
</Table>
Data as of August 31, 2004. Subject to change daily. All percentages for top 10
holdings and top five industries are as a percentage of net assets. Provided for
informational purposes only and should not be deemed a recommendation to buy or
sell the securities mentioned. Morgan Stanley is a full-service securities firm
engaged in securities trading and brokerage activities, investment banking,
research and analysis, financing and financial advisory services.
HTTP://WWW.SEC.GOV. YOU MAY ALSO REVIEW AND COPY THEM AT THE SEC'S PUBLIC
REFERENCE ROOM IN WASHINGTON, DC. INFORMATION ON THE OPERATION OF THE SEC'S
PUBLIC REFERENCE ROOM MAY BE OBTAINED BY CALLING THE SEC AT (800) SEC-0330. YOU
CAN ALSO REQUEST COPIES OF THESE MATERIALS, UPON PAYMENT OF A DUPLICATING FEE,
BY ELECTRONIC REQUEST AT THE SEC'S E-MAIL ADDRESS (PUBLICINFO@SEC.GOV) OR BY
WRITING THE PUBLIC REFERENCE SECTION OF THE SEC, WASHINGTON, DC 20549-0102. YOU
MAY OBTAIN COPIES OF A FUND'S FISCAL QUARTER FILINGS BY CONTACTING MORGAN
STANLEY CLIENT RELATIONS AT (800) 869-NEWS.
PROXY VOTING POLICIES AND PROCEDURES
A DESCRIPTION OF (1) THE FUND'S POLICIES AND PROCEDURES WITH RESPECT TO THE
VOTING OF PROXIES RELATING TO THE FUND'S PORTFOLIO SECURITIES AND (2) HOW THE
FUND VOTED PROXIES RELATING TO PORTFOLIO SECURITIES DURING THE MOST RECENT
12-MONTH PERIOD ENDED AUGUST 31 IS AVAILABLE WITHOUT CHARGE, UPON REQUEST, BY
CALLING (800) 869-NEWS OR BY VISITING THE MUTUAL FUND CENTER ON OUR WEB SITE AT
WWW.MORGANSTANLEY.COM. THIS INFORMATION IS ALSO AVAILABLE ON THE SECURITIES AND
EXCHANGE COMMISSION'S WEB SITE AT HTTP://WWW.SEC.GOV.
4
PERFORMANCE SUMMARY
AVERAGE ANNUAL TOTAL RETURNS -- PERIOD ENDED AUGUST 31, 2004
<Table>
<Caption>
CLASS A SHARES* CLASS B SHARES** CLASS C SHARES(+) CLASS D SHARES(++)
(since 07/28/97) (since 03/30/81) (since 07/28/97) (since 07/28/97)
SYMBOL DIVAX DIVBX DIVCX DIVDX
1 YEAR 11.21%(4) 11.09%(4) 10.38%(4) 11.48%(4)
5.37(5) 6.42(5) 9.45(5) --
5 YEARS (0.78)(4) (1.37)(4) (1.51)(4) (0.55)(4)
(1.84)(5) (1.63)(5) (1.51)(5) --
10 YEARS -- 8.19(4) -- --
-- 8.19(5) -- --
SINCE INCEPTION 2.91(4) 11.66(4) 2.15(4) 3.15(4)
2.13(5) 11.66(5) 2.15(5) --
</Table>
Performance data quoted represents past performance, which is no guarantee of
future results and current performance may be lower or higher than the figures
shown. For most recent month-end performance figures, please visit
morganstanley.com or speak with your financial advisor. Investment returns and
principal value will fluctuate and fund shares, when redeemed, may be worth more
or less than their original cost. The table does not reflect the deduction of
taxes that a shareholder would pay on fund distributions or the redemption of
fund shares. Performance for Class A, Class B, Class C, and Class D shares will
vary due to differences in sales charges and expenses.
* The maximum front-end sales charge for Class A is 5.25%.
** The maximum contingent deferred sales charge (CDSC) for Class B is 5.0%. The
CDSC declines to 0% after six years.
+ The maximum contingent deferred sales charge for Class C is 1% for shares
redeemed within one year of purchase.
++ Class D has no sales charge.
(1) The Standard and Poor's 500 Index (S&P 500(R)) is a broad-based index, the
performance of which is based on the performance of 500 widely-held common
stocks chosen for market size, liquidity and industry group representation.
Indexes are unmanaged and their returns do not include any sales charges or
fees. Such costs would lower performance. It is not possible to invest
directly in an index.
(2) The Lipper Large-Cap Core Funds Index is an equally weighted performance
index of the largest qualifying funds (based on net assets) in the Lipper
Large-Cap Core Funds classification. The Index, which is adjusted for
capital gains distributions and income dividends, is unmanaged and should
not be considered an investment. There are currently 30 funds represented
in this Index. As of the date of this report, the Fund is in the Lipper
Large-Cap Core Funds classification.
(3) The Lipper Large-Cap Value Funds Index is an equally weighted performance
index of the largest qualifying funds (based on net assets) in the Lipper
Large-Cap Value Funds classification. The Index, which is adjusted for
capital gains distributions and income dividends, is unmanaged and should
not be considered an investment. There are currently 30 funds represented
in this Index.
(4) Figure shown assumes reinvestment of all distributions and does not reflect
the deduction of any sales charges.
(5) Figure shown assumes reinvestment of all distributions and the deduction of
the maximum applicable sales charge. See the Fund's current prospectus for
complete details on fees and sales charges.
5
EXPENSE EXAMPLE
As a shareholder of the Fund, you incur ongoing costs, including management
fees; distribution and service (12b-1) fees; and other Fund expenses. This
example is intended to help you understand your ongoing costs (in dollars) of
investing in the Fund and to compare these costs with the ongoing costs of
investing in other mutual funds.
The example is based on an investment of $1,000 invested at the beginning of the
period and held for the entire period 03/01/04 - 08/31/04.
ACTUAL EXPENSES
The first line of the table below provides information about actual account
values and actual expenses. You may use the information in this line, together
with the amount you invested, to estimate the expenses that you paid over the
period. Simply divide your account value by $1,000 (for example, an $8,600
account value divided by $1,000 = 8.6), then multiply the result by the number
in the first line under the heading entitled "Expenses Paid During Period" to
estimate the expenses you paid on your account during this period.
HYPOTHETICAL EXAMPLE FOR COMPARISON PURPOSES
The second line of the table below provides information about hypothetical
expenses based on the Fund's actual expense ratio and an assumed rate of return
of 5% per year before expenses, which is not the Fund's actual return. The
hypothetical account values and expenses may not be used to estimate the actual
ending account balance or expenses you paid for the period. You may use this
information to compare the ongoing cost of investing in the Fund and other
funds. To do so, compare this 5% hypothetical example with the 5% hypothetical
examples that appear in the shareholder reports of the other funds.
Please note that the expenses shown in the table are meant to highlight your
ongoing costs only. Therefore, the second line of the table is useful in
comparing ongoing costs, and will not help you determine the relative total cost
of owning different funds that have transactional costs, such as sales charges
(loads), and redemption fees, or exchange fees.
<Table>
<Caption>
BEGINNING ENDING EXPENSES PAID
ACCOUNT VALUE ACCOUNT VALUE DURING PERIOD *
------------- ------------- ---------------
03/01/04 -
03/01/04 08/31/04 08/31/04
------------- ------------- ---------------
CLASS A
Actual (-1.97% return)...................................... $1,000.00 $ 980.30 $4.04
Hypothetical (5% return before expenses).................... $1,000.00 $1,021.12 $4.13
CLASS B
Actual (-1.99% return)...................................... $1,000.00 $ 980.10 $4.09
Hypothetical (5% return before expenses).................... $1,000.00 $1,021.07 $4.18
CLASS C
Actual (-2.35% return)...................................... $1,000.00 $ 976.50 $7.77
Hypothetical (5% return before expenses).................... $1,000.00 $1,017.34 $7.93
CLASS D
Actual (-1.85% return)...................................... $1,000.00 $ 981.50 $2.80
Hypothetical (5% return before expenses).................... $1,000.00 $1,022.38 $2.85
</Table>
- ------------------
* Expenses are equal to the Fund's annualized expense ratio of 0.81%, 0.82%,
1.56% and 0.56% respectively, multiplied by the average account value over
the period, multiplied by 184/365 (to reflect the one-half year period).
6
Morgan Stanley Dividend Growth Securities Inc.
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2004 (UNAUDITED)
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
Common Stocks (99.2%)
Aerospace & Defense
(1.0%)
194,000 General Dynamics
Corp. ................ $ 18,942,160
991,200 Northrop Grumman
Corp. ................ 51,195,480
--------------
70,137,640
--------------
Aluminum (1.9%)
4,132,600 Alcoa, Inc. ........... 133,813,588
--------------
Apparel/Footwear (1.4%)
2,032,000 V.F. Corp. ............ 100,258,880
--------------
Apparel/Footwear Retail
(0.1%)
341,900 Gap, Inc. (The)........ 6,407,206
--------------
Auto Parts: O.E.M.
(1.8%)
2,272,800 Johnson Controls,
Inc. ................. 127,958,640
--------------
Beverages: Non-
Alcoholic (2.3%)
3,518,500 Coca-Cola Co. (The).... 157,312,135
--------------
Biotechnology (0.8%)
882,500 Amgen Inc.*............ 52,323,425
--------------
Chemicals: Major
Diversified (2.7%)
4,445,200 Dow Chemical Co.
(The)................. 190,299,012
--------------
Computer Communications
(0.7%)
2,719,400 Cisco Systems, Inc.*... 51,015,944
--------------
Computer Peripherals
(1.1%)
844,600 Lexmark International,
Inc.*................. 74,704,870
--------------
Computer Processing
Hardware (1.0%)
2,063,300 Dell Inc.*............. 71,885,372
--------------
</Table>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
Data Processing
Services (2.4%)
3,242,500 First Data Corp. ...... $ 136,995,625
1,020,800 Paychex, Inc. ......... 30,287,136
--------------
167,282,761
--------------
Discount Stores (3.0%)
4,699,400 Target Corp. .......... 209,499,252
--------------
Drugstore Chains (1.2%)
1,998,500 CVS Corp. ............. 79,940,000
--------------
Electric Utilities
(2.6%)
3,426,400 Exelon Corp. .......... 126,262,840
814,500 FPL Group, Inc. ....... 56,363,400
--------------
182,626,240
--------------
Finance/Rental/Leasing
(2.4%)
872,500 Fannie Mae............. 64,957,625
4,281,500 MBNA Corp. ............ 103,355,410
--------------
168,313,035
--------------
Financial Conglomerates
(3.5%)
3,756,700 Citigroup, Inc. ....... 174,987,086
1,706,800 J.P. Morgan Chase &
Co. .................. 67,555,144
--------------
242,542,230
--------------
Food Distributors
(0.9%)
1,903,800 SYSCO Corp. ........... 61,188,132
--------------
Food: Major Diversified
(2.7%)
3,675,200 PepsiCo, Inc. ......... 183,760,000
--------------
Food: Meat/Fish/Dairy
(0.1%)
197,700 Dean Foods Co.*........ 7,328,739
--------------
Home Improvement Chains
(2.7%)
5,094,000 Home Depot, Inc.
(The)................. 186,236,640
--------------
</Table>
7
See Notes to Financial Statements
Morgan Stanley Dividend Growth Securities Inc.
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2004 (UNAUDITED) continued
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
Household/Personal Care
(5.3%)
4,127,200 Avon Products, Inc. ... $ 182,339,696
3,234,200 Procter & Gamble Co.
(The)................. 181,018,174
--------------
363,357,870
--------------
Industrial
Conglomerates (9.4%)
2,646,500 3M Co. ................ 217,965,740
5,457,300 General Electric
Co. .................. 178,944,867
2,704,300 United Technologies
Corp. ................ 253,960,813
--------------
650,871,420
--------------
Information Technology
Services (3.3%)
1,773,900 Accenture Ltd. (Class
A) (Bermuda)*......... 46,298,790
2,128,600 International Business
Machines Corp. ....... 180,271,134
--------------
226,569,924
--------------
Integrated Oil (6.6%)
3,103,800 BP PLC (ADR) (United
Kingdom).............. 166,674,060
1,084,400 ChevronTexaco Corp. ... 105,729,000
4,037,900 Exxon Mobil Corp. ..... 186,147,190
--------------
458,550,250
--------------
Internet
Software/Services
(0.4%)
866,200 Yahoo! Inc.*........... 24,695,362
--------------
Investment Banks/
Brokers (3.5%)
813,200 Goldman Sachs Group,
Inc. (The)............ 72,903,380
779,700 Lehman Brothers
Holdings Inc. ........ 57,612,033
2,213,400 Merrill Lynch & Co.,
Inc. ................. 113,038,338
--------------
243,553,751
--------------
Investment Managers
(0.9%)
2,203,800 Mellon Financial
Corp. ................ 63,601,668
--------------
</Table>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
Life/Health Insurance
(2.1%)
3,237,300 Lincoln National
Corp. ................ $ 146,649,690
--------------
Major Banks (5.0%)
4,474,400 Bank of America
Corp. ................ 201,258,512
834,800 Comerica, Inc. ........ 50,213,220
1,973,300 KeyCorp................ 61,862,955
547,900 Wells Fargo & Co. ..... 32,189,125
--------------
345,523,812
--------------
Major
Telecommunications
(2.2%)
3,870,700 Verizon Communications
Inc. ................. 151,924,975
--------------
Managed Health Care
(1.2%)
436,457 Anthem, Inc.*.......... 35,457,767
1,553,600 Caremark Rx, Inc.*..... 44,588,320
--------------
80,046,087
--------------
Medical Specialties
(1.2%)
197,300 Bard (C.R.), Inc. ..... 11,068,530
1,384,200 Medtronic, Inc. ....... 68,863,950
--------------
79,932,480
--------------
Motor Vehicles (0.3%)
336,500 Harley-Davidson,
Inc. ................. 20,533,230
--------------
Multi-Line Insurance
(1.2%)
1,150,700 American International
Group, Inc. .......... 81,975,868
--------------
Office Equipment/
Supplies (2.3%)
3,675,100 Pitney Bowes, Inc. .... 160,087,356
--------------
Oil & Gas Production
(0.5%)
511,700 Devon Energy Corp. .... 33,163,277
--------------
Oilfield Services/
Equipment (0.8%)
1,858,000 Halliburton Co. ....... 54,197,860
--------------
</Table>
8
See Notes to Financial Statements
Morgan Stanley Dividend Growth Securities Inc.
PORTFOLIO OF INVESTMENTS - AUGUST 31, 2004 (UNAUDITED) continued
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
Other Consumer Services
(0.6%)
450,200 eBay Inc.*............. $ 38,960,308
--------------
Packaged Software
(3.8%)
338,900 Adobe Systems, Inc. ... 15,545,343
7,864,700 Microsoft Corp. ....... 214,706,310
922,000 SAP AG (ADR)
(Germany)............. 33,616,120
--------------
263,867,773
--------------
Pharmaceuticals: Major
(6.8%)
2,960,900 Bristol-Myers Squibb
Co. .................. 70,262,157
1,655,000 Johnson & Johnson...... 96,155,500
5,681,800 Pfizer, Inc. .......... 185,624,406
3,140,400 Wyeth.................. 114,844,428
--------------
466,886,491
--------------
Pharmaceuticals: Other
(0.9%)
2,232,400 Teva Pharmaceutical
Industries Ltd. (ADR)
(Israel).............. 60,832,900
--------------
Railroads (0.6%)
1,129,800 Burlington Northern
Santa Fe Corp. ....... 40,446,840
--------------
Semiconductors (1.8%)
1,892,700 Intel Corp. ........... 40,295,583
1,098,400 Marvell Technology
Group Ltd.
(Bermuda)*............ 25,395,008
457,000 Maxim Integrated
Products, Inc. ....... 19,847,510
2,041,100 Texas Instruments
Inc. ................. 39,883,094
--------------
125,421,195
--------------
Telecommunication
Equipment (0.5%)
1,179,700 Nokia Corp. (ADR)
(Finland)............. 14,014,836
576,000 QUALCOMM Inc. ......... 21,916,800
--------------
35,931,636
--------------
</Table>
<Table>
<Caption>
NUMBER OF
SHARES VALUE
- ------------------------------------------------------
Trucks/Construction/Farm
Machinery (1.7%)
1,806,400 Deere & Co. ........... $ 114,290,928
--------------
Total Common Stocks
(Cost
$3,372,156,486)........ 6,856,706,692
--------------
<Caption>
PRINCIPAL
AMOUNT IN
THOUSANDS
- -----------
Convertible Bond (0.1%)
Wireless Telecommunications (0.1%)
$ 7,969 Nextel Communications,
Inc.
5.25% due 01/15/10
(Cost $7,680,396)..... 7,978,961
--------------
Short-Term Investment (0.7%)
Repurchase Agreement
44,444 Joint repurchase
agreement account
1.57% due 09/01/04
(dated 08/31/04;
proceeds $44,445,938)
(a)
(Cost $44,444,000).... 44,444,000
--------------
</Table>
<Table>
Total Investments
(Cost $3,424,280,882)
(b)....................... 100.0% 6,909,129,653
Other Assets in Excess of
Liabilities............... 0.0 2,883,476
----- --------------
Net Assets................ 100.0% $6,912,013,129
===== ==============
</Table>
- ---------------------------------------------------
<Table>
ADR American Depository Receipt.
* Non-income producing security.
(a) Collateralized by federal agency and U.S. Treasury
obligations.
(b) The aggregate cost for federal income tax purposes
approximates the aggregate cost for book purposes.
The aggregate gross unrealized appreciation is
$3,517,133,228 and the aggregate gross unrealized
depreciation is $32,284,457, resulting in net
unrealized appreciation of $3,484,848,771.
</Table>
9
See Notes to Financial Statements
Morgan Stanley Dividend Growth Securities Inc.
SUMMARY OF INVESTMENTS - AUGUST 31, 2004 (UNAUDITED)
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ---------------------------------------------------------
Industrial Conglomerates... $ 650,871,420 9.4%
Pharmaceuticals: Major..... 466,886,491 6.8
Integrated Oil............. 458,550,250 6.6
Household/Personal Care.... 363,357,870 5.3
Major Banks................ 345,523,812 5.0
Packaged Software.......... 263,867,773 3.8
Investment Banks/Brokers... 243,553,751 3.5
Financial Conglomerates.... 242,542,230 3.5
Information Technology
Services.................. 226,569,924 3.3
Discount Stores............ 209,499,252 3.0
Chemicals: Major
Diversified............... 190,299,012 2.7
Home Improvement Chains.... 186,236,640 2.7
Food: Major Diversified.... 183,760,000 2.7
Electric Utilities......... 182,626,240 2.6
Finance/Rental/Leasing..... 168,313,035 2.4
Data Processing Services... 167,282,761 2.4
Office
Equipment/Supplies........ 160,087,356 2.3
Beverages: Non-Alcoholic... 157,312,135 2.3
Major Telecommunications... 151,924,975 2.2
Life/Health Insurance...... 146,649,690 2.1
Aluminum................... 133,813,588 1.9
Auto Parts: O.E.M.......... 127,958,640 1.8
Semiconductors............. 125,421,195 1.8
Trucks/Construction/Farm
Machinery................. 114,290,928 1.7
Apparel/Footwear........... 100,258,880 1.4
</Table>
<Table>
<Caption>
PERCENT OF
INDUSTRY VALUE NET ASSETS
- ---------------------------------------------------------
Multi-Line Insurance....... $ 81,975,868 1.2%
Managed Health Care........ 80,046,087 1.2
Drugstore Chains........... 79,940,000 1.2
Medical Specialties........ 79,932,480 1.2
Computer Peripherals....... 74,704,870 1.1
Computer Processing
Hardware.................. 71,885,372 1.0
Aerospace & Defense........ 70,137,640 1.0
Investment Managers........ 63,601,668 0.9
Food Distributors.......... 61,188,132 0.9
Pharmaceuticals: Other..... 60,832,900 0.9
Oilfield
Services/Equipment........ 54,197,860 0.8
Biotechnology.............. 52,323,425 0.8
Computer Communications.... 51,015,944 0.7
Repurchase Agreement....... 44,444,000 0.7
Railroads.................. 40,446,840 0.6
Other Consumer Services.... 38,960,308 0.6
Telecommunication
Equipment................. 35,931,636 0.5
Oil & Gas Production....... 33,163,277 0.5
Internet
Software/Services......... 24,695,362 0.4
Motor Vehicles............. 20,533,230 0.3
Wireless
Telecommunications........ 7,978,961 0.1
Food: Meat/Fish/Dairy...... 7,328,739 0.1
Apparel/Footwear Retail.... 6,407,206 0.1
-------------- -----
$6,909,129,653 100.0%
============== =====
</Table>
10
See Notes to Financial Statements
Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL STATEMENTS
Statement of Assets and Liabilities
August 31, 2004 (unaudited)
<Table>
Assets:
Investments in securities, at value
(cost $3,424,280,882)............. $6,909,129,653
Receivable for:
Dividends....................... 14,362,599
Capital stock sold.............. 1,304,815
Investments sold................ 141,832
Interest........................ 56,509
Prepaid expenses and other assets... 329,843
Receivable from affiliate........... 4,398,600
--------------
Total Assets.................... 6,929,723,851
--------------
Liabilities:
Payable for:
Capital stock redeemed.......... 9,003,951
Distribution fee................ 5,458,853
Investment management fee....... 2,593,299
Accrued expenses and other
payables.......................... 654,619
--------------
Total Liabilities............... 17,710,722
--------------
Net Assets...................... $6,912,013,129
==============
Composition of Net Assets:
Paid-in-capital..................... $3,028,258,181
Net unrealized appreciation......... 3,484,848,770
Accumulated undistributed net
investment income................. 24,318,084
Accumulated undistributed net
realized gain..................... 374,588,094
--------------
Net Assets...................... $6,912,013,129
==============
Class A Shares:
Net Assets.......................... $108,076,222
Shares Outstanding (500,000,000
authorized, $.01 par value)....... 2,910,725
Net Asset Value Per Share....... $37.13
==============
Maximum Offering Price Per
Share,
(net asset value plus 5.54% of
net asset value).............. $39.19
==============
Class B Shares:
Net Assets.......................... $6,136,857,549
Shares Outstanding (500,000,000
authorized, $.01 par value)....... 164,755,037
Net Asset Value Per Share....... $37.25
==============
Class C Shares:
Net Assets.......................... $105,011,839
Shares Outstanding (500,000,000
authorized, $.01 par value)....... 2,836,171
Net Asset Value Per Share....... $37.03
==============
Class D Shares:
Net Assets.......................... $562,067,519
Shares Outstanding (500,000,000
authorized, $.01 par value)....... 15,125,472
Net Asset Value Per Share....... $37.16
==============
</Table>
Statement of Operations
For the six months ended August 31, 2004 (unaudited)
<Table>
Net Investment Income:
Income
Dividends (net of $88,958 foreign
withholding tax)................... $ 71,165,336
Interest............................. 376,404
-------------
Total Income..................... 71,541,740
-------------
Expenses
Investment management fee............ 15,769,312
Distribution fee (Class A shares).... 149,185
Distribution fee (Class B shares).... 14,628,735
Distribution fee (Class C shares).... 565,136
Transfer agent fees and expenses..... 4,232,039
Shareholder reports and notices...... 176,485
Custodian fees....................... 150,400
Registration fees.................... 60,361
Directors' fees and expenses......... 56,419
Professional fees.................... 55,891
Other................................ 115,524
-------------
Total Expenses................... 35,959,487
Less: plan of distribution fee rebate
(Class B shares)................... (6,000,000)
-------------
Net Investment Income............ 41,582,253
-------------
Net Realized and Unrealized Gain
(Loss):
Net realized gain.................... 417,185,679
Net change in unrealized
appreciation....................... (611,480,181)
-------------
Net Loss......................... (194,294,502)
-------------
Net Decrease......................... $(152,712,249)
=============
</Table>
11
See Notes to Financial Statements
Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL STATEMENTS continued
Statement of Changes in Net Assets
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
AUGUST 31, 2004 FEBRUARY 29, 2004
--------------- -----------------
(unaudited)
Increase (Decrease) in Net Assets:
Operations:
Net investment income....................................... $ 41,582,253 $ 83,186,686
Net realized gain........................................... 417,185,679 1,166,883,849
Net change in unrealized appreciation....................... (611,480,181) 1,011,336,415
-------------- --------------
Net Increase (Decrease)................................. (152,712,249) 2,261,406,950
-------------- --------------
Dividends and Distributions to Shareholders from:
Net investment income
Class A shares.......................................... (755,057) (1,963,643)
Class B shares.......................................... (33,775,214) (74,340,471)
Class C shares.......................................... (267,155) (878,589)
Class D shares.......................................... (4,282,346) (8,714,782)
Net realized gain
Class A shares.......................................... (11,104,057) (10,500,574)
Class B shares.......................................... (612,978,197) (581,521,886)
Class C shares.......................................... (10,634,552) (8,873,020)
Class D shares.......................................... (54,212,881) (43,854,656)
-------------- --------------
Total Dividends and Distributions....................... (728,009,459) (730,647,621)
-------------- --------------
Net decrease from capital stock transactions................ (79,630,122) (241,898,098)
-------------- --------------
Net Increase (Decrease)................................. (960,351,830) 1,288,861,231
Net Assets:
Beginning of period......................................... 7,872,364,959 6,583,503,728
-------------- --------------
End of Period
(Including accumulated undistributed net investment income
of $24,318,084 and $21,815,603, respectively)............... $6,912,013,129 $7,872,364,959
============== ==============
</Table>
12
See Notes to Financial Statements
Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004 (UNAUDITED)
1. Organization and Accounting Policies
Morgan Stanley Dividend Growth Securities Inc. (the "Fund") is registered under
the Investment Company Act of 1940, as amended (the "Act"), as a diversified,
open-end management investment company. The Fund's investment objective is to
provide reasonable current income and long-term growth of income and capital.
The Fund was incorporated in Maryland on December 22, 1980 and commenced
operations on March 30, 1981. On July 28, 1997, the Fund converted to a multiple
class share structure.
The Fund offers Class A shares, Class B shares, Class C shares and Class D
shares. The four classes are substantially the same except that most Class A
shares are subject to a sales charge imposed at the time of purchase and some
Class A shares, and most Class B shares and Class C shares are subject to a
contingent deferred sales charge imposed on shares redeemed within one year, six
years and one year, respectively. Class D shares are not subject to a sales
charge. Additionally, Class A shares, Class B shares and Class C shares incur
distribution expenses.
The following is a summary of significant accounting policies:
A. Valuation of Investments -- (1) an equity portfolio security listed or traded
on the New York Stock Exchange ("NYSE") or American Stock Exchange or other
exchange is valued at its latest sale price prior to the time when assets are
valued; if there were no sales that day, the security is valued at the mean
between the last reported bid and asked price; (2) an equity portfolio security
listed or traded on the Nasdaq is valued at the Nasdaq Official Closing Price;
if there were no sales that day, the security is valued at the mean between the
last reported bid and asked price; (3) all other portfolio securities for which
over-the-counter market quotations are readily available are valued at the mean
between the last reported bid and asked price. In cases where a security is
traded on more than one exchange, the security is valued on the exchange
designated as the primary market; (4) for equity securities traded on foreign
exchanges, the last reported sale price or the latest bid price may be used if
there were no sales on a particular day; (5) when market quotations are not
readily available or Morgan Stanley Investment Advisors Inc. (the "Investment
Manager") determines that the latest sale price, the bid price or the mean
between the last reported bid and asked price do not reflect a security's market
value, portfolio securities are valued at their fair value as determined in good
faith under procedures established by and under the general supervision of the
Fund's Directors. Occasionally, developments affecting the closing prices of
securities and other assets may occur between the times at which valuations of
such securities are determined (that is, close of the foreign market on which
the securities trade) and the close of business on the NYSE. If developments
occur during such periods that are expected to materially affect the value of
such securities, such valuations may be adjusted to reflect the estimated fair
value of such securities as
13
Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004 (UNAUDITED) continued
of the close of the NYSE, as determined in good faith by the Fund's Directors or
by the Investment Manager using a pricing service and/or procedures approved by
the Directors of the Fund; (6) certain portfolio securities may be valued by an
outside pricing service approved by the Fund's Directors; and (7) short-term
debt securities having a maturity date of more than sixty days at time of
purchase are valued on a mark-to-market basis until sixty days prior to maturity
and thereafter at amortized cost based on their value on the 61st day.
Short-term debt securities having a maturity date of sixty days or less at the
time of purchase are valued at amortized cost.
B. Accounting for Investments -- Security transactions are accounted for on the
trade date (date the order to buy or sell is executed). Realized gains and
losses on security transactions are determined by the identified cost method.
Dividend income and other distributions are recorded on the ex-dividend date.
Discounts are accreted and premiums are amortized over the life of the
respective securities. Interest income is accrued daily.
C. Repurchase Agreements -- Pursuant to an Exemptive Order issued by the
Securities and Exchange Commission, the Fund, along with other affiliated
entities managed by the Investment Manager, may transfer uninvested cash
balances into one or more joint repurchase agreement accounts. These balances
are invested in one or more repurchase agreements and are collateralized by
cash, U.S. Treasury or federal agency obligations. The Fund may also invest
directly with institutions in repurchase agreements. The Fund's custodian
receives the collateral, which is marked-to-market daily to determine that the
value of the collateral does not decrease below the repurchase price plus
accrued interest.
D. Multiple Class Allocations -- Investment income, expenses (other than
distribution fees), and realized and unrealized gains and losses are allocated
to each class of shares based upon the relative net asset value on the date such
items are recognized. Distribution fees are charged directly to the respective
class.
E. Federal Income Tax Policy -- It is the Fund's policy to comply with the
requirements of the Internal Revenue Code applicable to regulated investment
companies and to distribute substantially all of its taxable income to its
shareholders. Accordingly, no federal income tax provision is required.
F. Dividends and Distributions to Shareholders -- Dividends and distributions to
shareholders are recorded on the ex-dividend date.
G. Use of Estimates -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts and disclosures.
Actual results could differ from those estimates.
14
Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004 (UNAUDITED) continued
2. Investment Management Agreement
Pursuant to an Investment Management Agreement with the Investment Manager, the
Fund pays a management fee, accrued daily and payable monthly, by applying the
following annual rates to the net assets of the Fund determined at the close of
each business day: 0.625% to the portion of daily net assets not exceeding $250
million; 0.50% to the portion of daily net assets exceeding $250 million but not
exceeding $1 billion; 0.475% to the portion of daily net assets exceeding $1
billion but not exceeding $2 billion; 0.45% to the portion of daily net assets
exceeding $2 billion but not exceeding $3 billion; 0.425% to the portion of
daily net assets exceeding $3 billion but not exceeding $4 billion; 0.40% to the
portion of daily net assets exceeding $4 billion but not exceeding $5 billion;
0.375% to the portion of daily net assets exceeding $5 billion but not exceeding
$6 billion; 0.35% to the portion of daily net assets exceeding $6 billion but
not exceeding $8 billion; 0.325% to the portion of daily net assets exceeding $8
billion but not exceeding $10 billion; 0.30% to the portion of daily net assets
exceeding $10 billion but not exceeding $15 billion; and 0.275% to the portion
of daily net assets exceeding $15 billion.
3. Plan of Distribution
Shares of the Fund are distributed by Morgan Stanley Distributors Inc. (the
"Distributor"), an affiliate of the Investment Manager. The Fund has adopted a
Plan of Distribution (the "Plan") pursuant to Rule 12b-1 under the Act. The Plan
provides that the Fund will pay the Distributor a fee which is accrued daily and
paid monthly at the following annual rates: (i) Class A -- up to 0.25% of the
average daily net assets of Class A; (ii) Class B -- up to 1.0% of the lesser
of: (a) the average daily aggregate gross sales of the Class B shares since the
inception of the Plan on July 2, 1984 (not including reinvestment of dividend or
capital gain distributions) less the average daily aggregate net asset value of
the Class B shares redeemed since the Plan's inception upon which a contingent
deferred sales charge has been imposed or waived; or (b) the average daily net
assets of Class B attributable to shares issued, net of related shares redeemed,
since the Plan's inception; and (iii) Class C -- up to 1.0% of the average daily
net assets of Class C.
In the case of Class B shares, provided that the Plan continues in effect, any
cumulative expenses incurred by the Distributor but not yet recovered may be
recovered through the payment of future distribution fees from the Fund pursuant
to the Plan and contingent deferred sales charges paid by investors upon
redemption of Class B shares. Although there is no legal obligation for the Fund
to pay expenses incurred in excess of payments made to the Distributor under the
Plan and the proceeds of contingent deferred sales charges paid by investors
upon redemption of shares, if for any reason the Plan is terminated, the
Trustees will consider at that time the manner in which to
15
Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004 (UNAUDITED) continued
treat such expenses. The Distributor has advised the Fund that there were no
excess expenses as of August 31, 2004.
For the six months ended August 31, 2004, the Distributor rebated a portion of
the distribution fees paid by the Fund on Class B shares in the amount of
$6,000,000. Included in the Statement of Assets and Liabilities is a receivable
from affiliate which represents a distribution fee rebate due to the Fund.
In the case of Class A shares and Class C shares, expenses incurred pursuant to
the Plan in any calendar year in excess of 0.25% or 1.0% of the average daily
net assets of Class A or Class C, respectively, will not be reimbursed by the
Fund through payments in any subsequent year, except that expenses representing
a gross sales credit to Morgan Stanley Financial Advisors or other selected
broker-dealer representatives may be reimbursed in the subsequent calendar year.
For the six months ended August 31, 2004, the distribution fee was accrued for
Class A shares and Class C shares at the annual rate of 0.25% and 1.0%,
respectively.
The Distributor has informed the Fund that for the six months ended August 31,
2004, it received contingent deferred sales charges from certain redemptions of
the Fund's Class B shares and Class C shares of $2,005,654 and $7,673,
respectively and received $157,230 in front-end sales charges from sales of the
Fund's Class A shares. The respective shareholders pay such charges which are
not an expense of the Fund.
4. Security Transactions and Transactions with Affiliates
The cost of purchases and the proceeds from sales of portfolio securities,
excluding short-term investments, for the six months ended August 31, 2004
aggregated $1,532,305,873 and $2,215,780,989, respectively.
For the six months ended August 31, 2004, the Fund incurred brokerage
commissions of $740,545 with Morgan Stanley & Co., Inc., an affiliate of the
Investment Manager and Distributor, for portfolio transactions executed on
behalf of the Fund.
The Fund has an unfunded noncontributory defined benefit pension plan covering
certain independent Directors of the Fund who will have served as independent
Directors for at least five years at the time of retirement. Benefits under this
plan are based on factors which include years of service and compensation.
Aggregate pension costs for the six months ended August 31, 2004 included in
Directors' fees and expenses in the Statement of Operations amounted to $3,563.
At August 31, 2004, the Fund had an accrued pension liability of $62,105 which
is included in accrued expenses in the Statement of Assets and Liabilities. On
December 2, 2003, the Directors voted to close the
16
Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004 (UNAUDITED) continued
plan to new participants and eliminate the future benefits growth due to
increases to compensation after July 31, 2003.
Effective April 1, 2004, the Fund began an unfunded Deferred Compensation Plan
(the "Compensation Plan") which allows each independent Director to defer
payment of all, or a portion, of the fees he receives for serving on the Board
of Directors. Each eligible Director generally may elect to have the deferred
amounts credited with a return equal to the total return on one or more of the
Morgan Stanley funds that are offered as investment options under the
Compensation Plan. Appreciation/depreciation and distributions received from
these investments are recorded with an offsetting increase/decrease in the
deferred compensation obligation and do not affect the net asset value of the
Fund.
Morgan Stanley Trust, an affiliate of the Investment Manager and Distributor, is
the Fund's transfer agent. At August 31, 2004, the Fund had transfer agent fees
and expenses payable of approximately $339,000.
5. Federal Income Tax Status
The amount of dividends and distributions from net investment income and net
realized capital gains are determined in accordance with federal income tax
regulations which may differ from generally accepted accounting principles.
These "book/tax" differences are either considered temporary or permanent in
nature. To the extent these differences are permanent in nature, such amounts
are reclassified within the capital accounts based on their federal tax-basis
treatment; temporary differences do not require reclassification. Dividends and
distributions which exceed net investment income and net realized capital gains
for tax purposes are reported as distributions of paid-in-capital.
As of February 29, 2004, the Fund had a net capital loss carryforward of
$42,620,160 of which $37,562,781 will expire on February 28, 2010, and
$5,057,379 will expire on February 28, 2011 to offset future capital gains to
the extent provided by regulations.
As part of the Fund's acquisition of the assets of Morgan Stanley Equity Fund
("Equity"), the Fund obtained a net capital loss carryforward of $121,087,370
from Equity. Utilization of this carryforward is subject to limitations imposed
by the Internal Revenue Code and Treasury Regulations, reducing the total
carryforward available.
As of February 29, 2004, the Fund had temporary book/tax differences primarily
attributable to capital loss deferrals on wash sales.
17
Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004 (UNAUDITED) continued
6. Capital Stock
Transactions in capital stock were as follows:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR
MONTHS ENDED ENDED
AUGUST 31, 2004 FEBRUARY 29, 2004
--------------------------- -----------------------------
(unaudited)
SHARES AMOUNT SHARES AMOUNT
----------- ------------- ----------- ---------------
CLASS A SHARES
Sold........................................ 259,434 $ 10,217,014 651,542 $ 25,429,321
Shares issued in connection with the
acquisition of Morgan Stanley Equity
Fund...................................... -- -- 101,388 4,101,120
Reinvestment of dividends and
distributions............................. 285,346 10,896,413 284,735 11,143,948
Redeemed.................................... (644,319) (25,230,370) (1,097,538) (43,265,319)
----------- ------------- ----------- ---------------
Net decrease - Class A...................... (99,539) (4,116,943) (59,873) (2,590,930)
----------- ------------- ----------- ---------------
CLASS B SHARES
Sold........................................ 2,397,801 96,334,043 9,195,221 362,374,599
Shares issued in connection with the
acquisition of Morgan Stanley Equity
Fund...................................... -- -- 2,575,564 104,507,279
Reinvestment of dividends and
distributions............................. 15,287,187 585,447,036 15,069,631 591,619,055
Redeemed.................................... (20,207,301) (800,836,806) (36,423,311) (1,429,573,259)
----------- ------------- ----------- ---------------
Net decrease - Class B...................... (2,522,313) (119,055,727) (9,582,895) (371,072,326)
----------- ------------- ----------- ---------------
CLASS C SHARES
Sold........................................ 184,944 7,393,121 558,455 22,071,616
Shares issued in connection with the
acquisition of Morgan Stanley Equity
Fund...................................... -- -- 193,897 7,834,971
Reinvestment of dividends and
distributions............................. 271,404 10,344,107 235,875 9,228,507
Redeemed.................................... (439,387) (17,146,994) (602,576) (23,686,489)
----------- ------------- ----------- ---------------
Net increase - Class C...................... 16,961 590,234 385,651 15,448,605
----------- ------------- ----------- ---------------
CLASS D SHARES
Sold........................................ 1,879,266 74,695,554 4,007,163 159,335,542
Shares issued in connection with the
acquisition of Morgan Stanley Equity
Fund...................................... -- -- 205,852 8,330,415
Reinvestment of dividends and
distributions............................. 1,398,317 53,459,794 1,254,655 49,088,021
Redeemed.................................... (2,144,077) (85,202,434) (2,534,996) (100,437,425)
----------- ------------- ----------- ---------------
Net increase - Class D...................... 1,133,506 42,952,314 2,932,674 116,316,553
----------- ------------- ----------- ---------------
Net decrease in Fund........................ (1,471,385) $ (79,630,122) (6,324,445) $ (241,898,098)
=========== ============= =========== ===============
</Table>
7. Fund Acquisition
On December 22, 2003, the Fund acquired all the net assets of Morgan Stanley
Equity Fund ("Equity") based on the respective valuations as of the close of
business on December 19, 2003 pursuant to a plan of reorganization approved by
the shareholders of Equity on December 16, 2003.
18
Morgan Stanley Dividend Growth Securities Inc.
NOTES TO FINANCIAL STATEMENTS - AUGUST 31, 2004 (UNAUDITED) continued
The acquisition was accomplished by a tax-free exchange of 101,388 Class A
shares of the Fund at a net asset value of $40.44 per share for 533,970 Class A
shares of Equity; 2,575,564 Class B shares of the Fund at a net asset value of
$40.55 per share for 14,209,727 Class B shares of Equity; 193,897 Class C shares
of the Fund at a net asset value of $40.39 per share for 1,059,741 Class C
shares of Equity; and 205,852 Class D shares of the Fund at a net asset value of
$40.45 per share for 1,068,353 Class D shares of Equity. The net assets of the
Fund and Equity immediately before the acquisition were $7,684,808,181 and
$124,930,805, respectively, including unrealized appreciation of $8,380,961 for
Equity. Immediately after the acquisition, the combined net assets of the Fund
amounted to $7,809,738,986.
8. Legal Matters
The Investment Manager, certain affiliates of the Investment Manager, certain
officers of such affiliates and certain investment companies advised by the
Investment Manager or its affiliates, including the Fund, are named as
defendants in a number of similar class action complaints which were recently
consolidated. This consolidated action also names as defendants certain
individual Trustees and Directors of the Morgan Stanley funds. The consolidated
amended complaint generally alleges that defendants, including the Fund,
violated their statutory disclosure obligations and fiduciary duties by failing
properly to disclose (i) that the Investment Manager and certain affiliates of
the Investment Manager allegedly offered economic incentives to brokers and
others to recommend the funds advised by the Investment Manager or its
affiliates to investors rather than funds managed by other companies, and (ii)
that the funds advised by the Investment Manager or its affiliates, including
the Fund, allegedly paid excessive commissions to brokers in return for their
efforts to recommend these funds to investors. The complaint seeks, among other
things, unspecified compensatory damages, rescissionary damages, fees and costs.
The defendants have moved to dismiss the action and intend to otherwise
vigorously defend it. While the Fund believes that it has meritorious defenses,
the ultimate outcome of this matter is not presently determinable at this early
stage of the litigation, and no provision has been made in the Fund's financial
statements for the effect, if any, of this matter.
19
Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL HIGHLIGHTS
Selected ratios and per share data for a share of capital stock outstanding
throughout each period:
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED FEBRUARY 28,
MONTHS ENDED --------------------------------------------------------------------
AUGUST 31, 2004 2004* 2003 2002 2001 2000*
--------------- -------- -------- -------- -------- --------
(unaudited)
Class A Shares
Selected Per Share Data:
Net asset value, beginning of
period........................... $42.01 $ 34.01 $ 46.44 $ 52.54 $ 50.11 $ 60.22
------ ------- ------- ------- ------- -------
Income (loss) from investment
operations:
Net investment income++....... 0.22 0.61 0.68 0.71 0.84 0.94
Net realized and unrealized
gain (loss)................... (0.94) 11.62 (11.41) (3.51) 8.35 (7.75)
------ ------- ------- ------- ------- -------
Total income (loss) from
investment operations............ (0.72) 12.23 (10.73) (2.80) 9.19 (6.81)
------ ------- ------- ------- ------- -------
Less dividends and distributions
from:
Net investment income......... (0.26) (0.65) (0.72) (0.70) (0.92) (0.99)
Net realized gain............. (3.90) (3.58) (0.98) (2.60) (5.84) (2.31)
------ ------- ------- ------- ------- -------
Total dividends and
distributions.................... (4.16) (4.23) (1.70) (3.30) (6.76) (3.30)
------ ------- ------- ------- ------- -------
Net asset value, end of period.... $37.13 $ 42.01 $ 34.01 $ 46.44 $ 52.54 $ 50.11
====== ======= ======= ======= ======= =======
Total Return+..................... (1.97)%(1) 37.26% (23.66)% (5.35)% 19.31% (12.07)%
Ratios to Average Net Assets(3):)
Expenses.......................... 0.81 %(2) 0.80% 0.77% 0.73% 0.73% 0.67%
Net investment income............. 1.12 %(2) 1.56% 1.69% 1.46% 1.57% 1.52%
Supplemental Data:
Net assets, end of period, in
millions......................... $108 $126 $104 $145 $223 $215
Portfolio turnover rate........... 21 %(1) 34% 7% 0% 1% 4%
</Table>
- ---------------------
<Table>
* Year ended February 29.
++ The per share amounts were computed using an average number
of shares outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated
based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and
non-class specific expenses.
</Table>
20
See Notes to Financial Statements
Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED FEBRUARY 28,
MONTHS ENDED -------------------------------------------------------------------------
AUGUST 31, 2004 2004* 2003 2002 2001 2000*
--------------- ----------- ----------- --------- --------- ---------
(unaudited)
Class B Shares
Selected Per Share Data:
Net asset value,
beginning of period.... $42.08 $34.04 $46.46 $52.54 $ 50.10 $60.18
------ ------ ------ ------ -------- ------
Income (loss) from
investment operations:
Net investment
income++............ 0.19 0.43 0.37 0.34 0.47 0.64
Net realized and
unrealized gain
(loss).............. (0.91) 11.64 (11.41) (3.50) 8.35 (7.73)
------ ------ ------ ------ -------- ------
Total income (loss) from
investment
operations............. (0.72) 12.07 (11.04) (3.16) 8.82 (7.09)
------ ------ ------ ------ -------- ------
Less dividends and
distributions from:
Net investment
income.............. (0.21) (0.45) (0.40) (0.32) (0.54) (0.68)
Net realized gain... (3.90) (3.58) (0.98) (2.60) (5.84) (2.31)
------ ------ ------ ------ -------- ------
Total dividends and
distributions.......... (4.11) (4.03) (1.38) (2.92) (6.38) (2.99)
------ ------ ------ ------ -------- ------
Net asset value, end of
period................. $37.25 $42.08 $34.04 $46.46 $ 52.54 $50.10
====== ====== ====== ====== ======== ======
Total Return+........... (1.99)%(1) 36.62% (24.27)% (6.06)% 18.48% (12.49)%
Ratios to Average Net
Assets(3):
Expenses................ 0.82 %(2)(4) 1.28%(4) 1.54% 1.49% 1.42% 1.15%
Net investment income... 1.11 %(2)(4) 1.08%(4) 0.92% 0.70% 0.88% 1.04%
Supplemental Data:
Net assets, end of
period, in millions.... $6,137 $7,040 $6,020 $9,865 $11,819 $12,869
Portfolio turnover
rate................... 21 %(1) 34% 7% 0% 1% 4%
</Table>
- ---------------------
<Table>
* Year ended February 29.
++ The per share amounts were computed using an average number of shares outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated based on the net asset value as of the last business day
of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and non-class specific expenses.
(4) If the Distributor had not rebated a portion of its fee to the Fund, the expense and net investment income ratios
would have been:
EXPENSE NET INVESTMENT
PERIOD ENDED RATIO INCOME RATIO
----------------- ---- ----
August 31, 2004 1.00% 0.93%
February 29, 2004 1.56% 0.80%
</Table>
21
See Notes to Financial Statements
Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED FEBRUARY 28,
MONTHS ENDED ---------------------------------------------------------------------
AUGUST 31, 2004 2004* 2003 2002 2001 2000*
--------------- -------- --------- -------- -------- --------
(unaudited)
Class C Shares
Selected Per Share Data:
Net asset value, beginning of
period.......................... $41.89 $ 33.92 $ 46.32 $ 52.44 $ 49.96 $ 60.02
------ ------- -------- ------- ------- -------
Income (loss) from investment
operations:
Net investment income++...... 0.07 0.31 0.37 0.35 0.50 0.47
Net realized and unrealized
gain (loss).................. (0.93) 11.60 (11.38) (3.49) 8.32 (7.70)
------ ------- -------- ------- ------- -------
Total income (loss) from
investment operations........... (0.86) 11.91 (11.01) (3.14) 8.82 (7.23)
------ ------- -------- ------- ------- -------
Less dividends and distributions
from:
Net investment income........ (0.10) (0.36) (0.41) (0.38) (0.50) (0.52)
Net realized gain............ (3.90) (3.58) (0.98) (2.60) (5.84) (2.31)
------ ------- -------- ------- ------- -------
Total dividends and
distributions................... (4.00) (3.94) (1.39) (2.98) (6.34) (2.83)
------ ------- -------- ------- ------- -------
Net asset value, end of period... $37.03 $ 41.89 $ 33.92 $ 46.32 $ 52.44 $ 49.96
====== ======= ======== ======= ======= =======
Total Return+.................... (2.35)%(1) 36.25% (24.26)% (6.05)% 18.54% (12.73)%
Ratios to Average Net Assets(3):
Expenses......................... 1.56 %(2) 1.56% 1.54% 1.48% 1.37% 1.43%
Net investment income............ 0.37 %(2) 0.80% 0.92% 0.71% 0.93% 0.76%
Supplemental Data:
Net assets, end of period, in
millions........................ $105 $118 $83 $125 $139 $135
Portfolio turnover rate.......... 21 %(1) 34% 7% 0% 1% 4%
</Table>
- ---------------------
<Table>
* Year ended February 29.
++ The per share amounts were computed using an average number
of shares outstanding during the period.
+ Does not reflect the deduction of sales charge. Calculated
based on the net asset value as of the last business day of
the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and
non-class specific expenses.
</Table>
22
See Notes to Financial Statements
Morgan Stanley Dividend Growth Securities Inc.
FINANCIAL HIGHLIGHTS continued
<Table>
<Caption>
FOR THE SIX FOR THE YEAR ENDED FEBRUARY 28,
MONTHS ENDED ---------------------------------------------------------------------
AUGUST 31, 2004 2004* 2003 2002 2001 2000*
--------------- -------- --------- -------- -------- --------
(unaudited)
Class D Shares
Selected Per Share Data:
Net asset value, beginning of
period.......................... $42.04 $ 34.03 $ 46.47 $ 52.59 $ 50.16 $ 60.26
------ ------- -------- ------- ------- -------
Income (loss) from investment
operations:
Net investment income++...... 0.28 0.70 0.77 0.83 0.97 1.09
Net realized and unrealized
gain (loss).................. (0.95) 11.63 (11.41) (3.53) 8.35 (7.76)
------ ------- -------- ------- ------- -------
Total income (loss) from
investment operations........... (0.67) 12.33 (10.64) (2.70) 9.32 (6.67)
------ ------- -------- ------- ------- -------
Less dividends and distributions
from:
Net investment income........ (0.31) (0.74) (0.82) (0.82) (1.05) (1.12)
Net realized gain............ (3.90) (3.58) (0.98) (2.60) (5.84) (2.31)
------ ------- -------- ------- ------- -------
Total dividends and
distributions................... (4.21) (4.32) (1.80) (3.42) (6.89) (3.43)
------ ------- -------- ------- ------- -------
Net asset value, end of period... $37.16 $ 42.04 $ 34.03 $ 46.47 $ 52.59 $ 50.16
====== ======= ======== ======= ======= =======
Total Return+.................... (1.85)%(1) 37.58% (23.50)% (5.10)% 19.60% (11.85)%
Ratios to Average Net Assets(3):
Expenses......................... 0.56 %(2) 0.56% 0.54% 0.49% 0.48% 0.43%
Net investment income............ 1.37 %(2) 1.80% 1.92% 1.70% 1.82% 1.76%
Supplemental Data:
Net assets, end of period, in
millions........................ $562 $588 $376 $480 $424 $405
Portfolio turnover rate.......... 21 %(1) 34% 7% 0% 1% 4%
</Table>
- ---------------------
<Table>
* Year ended February 29.
++ The per share amounts were computed using an average number
of shares outstanding during the period.
+ Calculated based on the net asset value as of the last
business day of the period.
(1) Not annualized.
(2) Annualized.
(3) Reflects overall Fund ratios for investment income and
non-class specific expenses.
</Table>
23
See Notes to Financial Statements
DIRECTORS
Michael Bozic
Charles A. Fiumefreddo
Edwin J. Garn
Wayne E. Hedien
James F. Higgins
Dr. Manuel H. Johnson
Joseph J. Kearns
Michael E. Nugent
Fergus Reid
OFFICERS
Charles A. Fiumefreddo
Chairman of the Board
Mitchell M. Merin
President
Ronald E. Robison
Executive Vice President and Principal Executive Officer
Barry Fink
Vice President
Joseph J. McAlinden
Vice President
Amy R. Doberman
Vice President
Stefanie V. Chang
Vice President
Francis J. Smith
Treasurer and Chief Financial Officer
Thomas F. Caloia
Vice President
Mary E. Mullin
Secretary
TRANSFER AGENT
Morgan Stanley Trust
Harborside Financial Center, Plaza Two
Jersey City, New Jersey 07311
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Deloitte & Touche LLP
Two World Financial Center
New York, New York 10281
INVESTMENT MANAGER
Morgan Stanley Investment Advisors Inc.
1221 Avenue of the Americas
New York, New York 10020
The financial statements included herein have been taken from the records of the
Fund without examination by the independent auditors and accordingly they do not
express an opinion thereon.
This report is submitted for the general information of the shareholders of the
Fund. For more detailed information about the Fund, its fees and expenses and
other pertinent information, please read its Prospectus. The Fund's Statement of
Additional Information contains additional information about the Fund, including
its directors. It is available, without charge, by calling (800) 869-NEWS.
This report is not authorized for distribution to prospective investors in the
Fund unless preceded or accompanied by an effective Prospectus. Read the
Prospectus carefully before investing.
Investments and services offered through Morgan Stanley DW Inc., member SIPC.
Morgan Stanley Distributors Inc., member NASD.
(c) 2004 Morgan Stanley
[MORGAN STANLEY LOGO]
MORGAN STANLEY FUNDS
Morgan Stanley
Dividend GrowthSecurities
Semiannual Report
August 31, 2004
[MORGAN STANLEY LOGO]
37910RPT-RA04-00646P-Y09/04
Item 2. Code of Ethics.
Not applicable for semiannual reports.
Item 3. Audit Committee Financial Expert.
Not applicable for semiannual reports.
Item 4. Principal Accountant Fees and Services
Not applicable for semiannual reports.
Item 5. Audit Committee of Listed Registrants.
Not applicable for semiannual reports.
Item 6.
Refer to Item 1.
Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End
Management Investment Companies.
Not applicable for semiannual reports.
Item 8. Closed-End Fund Repurchases
Applicable to reports filed by closed-end funds.
Item 9. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 10 - Controls and Procedures
(a) The Fund's principal executive officer and principal financial officer have
concluded that the Fund's disclosure controls and procedures are sufficient to
ensure that information required to be disclosed by the Fund in this Form N-CSR
was recorded, processed, summarized and reported within the time periods
specified in the Securities and Exchange Commission's rules and forms, based
upon such officers' evaluation of these controls and procedures as of a date
within 90 days of the filing date of the report.
There were no significant changes or corrective actions with regard to
significant deficiencies or material weaknesses in the Fund's internal controls
or in other factors that could significantly affect the Fund's internal controls
subsequent to the date of their evaluation.
(b) There were no changes in the registrant's internal control over financial
reporting that occurred during the registrant's most recent fiscal half-year
(the registrant's second fiscal half-year in the case of an annual report) that
has materially affected, or is reasonably likely to materially affect, the
registrant's internal control over financial reporting.
Item 11 Exhibits
(a) Code of Ethics - Not applicable for semiannual reports.
(b) A separate certification for each principal executive officer and principal
financial officer of the registrant are attached hereto as part of EX-99.CERT.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, the registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized.
Morgan Stanley Dividend Growth Securities Inc.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
October 20, 2004
Pursuant to the requirements of the Securities Exchange Act of 1934 and
the Investment Company Act of 1940, this report has been signed by the following
persons on behalf of the registrant and in the capacities and on the dates
indicated.
/s/ Ronald E. Robison
Ronald E. Robison
Principal Executive Officer
October 20, 2004
/s/ Francis Smith
Francis Smith
Principal Financial Officer
October 20, 2004
3