Federated Strategic Value Dividend Fund (R6) SVALX

Share Classes Product Type Asset Class Category
Mutual Fund Equity Large Cap
As of 09-30-2017

Highlights

  • Federated Strategic Value Dividend Fund (A Shares) provided a 30-day SEC yield of 3.1% and gross weighted median dividend yield of 4.2% at quarter end.
  • There were nine dividend increases during the quarter, the more notable increases courtesy of Paychex and Altria, which increased their dividend payments by 8.7% and 8.2%, respectively. For the rolling 1-year period, 33 companies raised their dividends, accounting for 36 increases overall.
  • The “risk-on” theme was prevalent in the quarter as low yield, high beta and low quality all outperformed. Although these investor preferences are not conducive to a high-quality dividend strategy, the fund still posted a positive return of 2.7% (A Shares at NAV).

Looking Back

The fund continued to remain focused on its core goals of providing a high and rising income stream from high-quality assets as it ended the quarter with a gross weighted average dividend yield of 4.2%. This exceeded not only the broad market represented by the S&P 500 Index with its 2.0% yield, and the 10-year U.S. Treasury Note (2.3%), but it also surpassed the 3.5% yield of the Dow Jones Select Dividend Index, which aims to reflect the domestic high-dividend-paying universe. Year-to-date, the fund has now had 25 of its 41 holdings increase their dividend distributions. Looking at a longer time frame, 33 companies within the fund raised their dividends, accounting for 36 increases overall in the trailing 12-months.

Investor preferences were dominated by a strong “risk-on” trade during the quarter as low quality, high beta and low yield all outperformed. In fact, when examining Standard & Poor’s credit ratings, C and D rated stocks outpaced A+ rated stocks by 5.8%. Further, when quintiling the S&P 500, high beta outperformed low beta by 3.8% and low-dividend yield outperformed high-dividend yield by 1.8%. These preferences do not align with a high-quality, dividend-oriented strategy but the fund still provided a positive total return of 2.7% ( A Shares at NAV) for the quarter, bringing the year-to-date total return to 11.3% ( A Shares at NAV).

Performance

The fund ended the quarter with a return of 2.7% (A Shares at NAV), while the Dow Jones Select Dividend Index and the S&P 500 posted returns of 2.5% and 4.5%, respectively.

Performance quoted represents past performance, which is no guarantee of future results. Investment return and principal value will fluctuate so that an investor’s shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than what is stated. Other share classes may have experienced different returns than the share class presented. To view performance current to the most recent month-end and for after-tax returns, click on the Performance tab. Performance does not reflect the maximum 5.5% sales charge for A Shares. If included, it would reduce the performance quoted.

Click the Performance tab for standard fund performance

Performance Contributors

  • Strong performance was noted in the portfolio’s Energy holdings, which posted an 8.9% total return. Oil rallied by 20% since June, driven by the tightening oil market. Highest total returns were noted in Chevron and BP posting 13.8% and 13.2% total returns, respectively.
  • Health Care contributed positively to performance, generating a 7.3% return for the fund led by AbbVie, which posted a 23.6% return for the quarter. AbbVie’s stock was bolstered by the Humira patent challenge denial and pipeline drug success in multiple phase 3 trials.
  • Telecom posted positive performance generating a 5.4% total return, as the possibility of a merger between Sprint and T-Mobile buoyed Telecom share prices.

Click on the Portfolio Characteristics tab for the fund’s top 10 holdings

Performance Detractors

  • High quality, high yield and low beta underperformed during the quarter, which challenges a high-yield dividend strategy.
  • Consumer Staples was the fund’s noted laggard generating a -4.8% return, driven by tobacco name Altria, which declined 14% in the quarter after the FDA announced that it would begin a public dialogue on the prospects of lowering the nicotine levels in cigarettes to non-addictive levels. In addition, Kimberly Clark and General Mills also detracted from performance within Consumer Staples with returns of -8.1% and -5.7%, respectively.
  • Additional names that detracted from performance were GlaxoSmithKline (-4.8%) and REIT investment Ventas (-5%).

Looking Ahead

In the U.S., massive hurricanes Harvey and Irma began to muddy the economic data, as jobless claims spiked, job growth slowed and auto and home sales softened. But various regional and national gauges suggested underlying trends remained solid, with the ISM Manufacturing Index rising at its fastest pace in 13 years and the final read on second-quarter GDP coming in at its fastest annual pace in more than two years. Abetting the ongoing rise in risk assets was movement on potential corporate and individual tax reform and a Federal Reserve that promised a very measured pace of both balance-sheet unwinding and future rate increases.

The fund remains concentrated in Consumer Staples, Integrated Energy, Pharmaceuticals, Telecom Services and Utilities. These segments contain the dividend-friendly stocks that the fund seeks, enabling the strategy to provide investors with the opportunity for a high-dividend yield complemented with dividend growth. That dividend growth may help the fund both sustain its high yield and outpace inflation. Furthermore, stocks that consistently pay and increase their dividends tend to have lower volatility, as reflected in the fund’s beta of .55 (FactSet 3-year beta versus the S&P 500 calculated using the monthly return).  Notwithstanding current market conditions, Federated Strategic Value Dividend Fund will remain committed to its goals of providing a high and rising income stream from high-quality business assets and will not alter its investment style based on near-term market preferences.