Federated Strategic Value Dividend Fund (R6) SVALX

Share Classes Product Type Asset Class Category
Mutual Fund Equity Large Cap
As of 12-31-2017

Highlights

  • Federated Strategic Value Dividend Fund (A shares) provided a 30-day SEC yield of 2.88% and a gross weighted average dividend yield of 4.2% at month end
  • There was dividend growth during the quarter as 10 companies increased their dividend payments, accounting for 11 increases overall
  • For the rolling 1-year period, 32 companies raised their dividends, accounting for 36 increases overall
  • Markets rallied and reached new highs after announcement of the tax reform bill, triggering a “risk-on” trade which was the dominant theme for the quarter as low yield and high beta outperformed

Looking Back

The fund is steadfast on maintaining its focus of providing investors with opportunity for a stable, high and rising income stream from high-quality investments, ending the month with a 30-day SEC yield of 2.88% and 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 1.9% yield, and the 10-year U.S. Treasury Note (2.4%), but it also surpassed the 3.3% yield of the Dow Jones Select Dividend Index, which aims to reflect the domestic high-dividend-paying universe. Regarding the fund’s second core goal, dividend growth, 32 companies within the fund raised their dividends, accounting for 36 increases in the trailing 12 months.  Additionally, accretive trading further enhanced the strategy’s dividend growth trajectory.  This occurs when we have the opportunity to reduce or sell appreciated assets where dividend yields have declined and redeploy greater dollars into higher-yielding investments.  The elimination of Consolidated Edison and the reduction of Abbvie, where proceeds were applied to higher-yielding investments in Energy, Tobacco and our lone financial holding CIBC, provided a natural tail wind to dividend growth for the strategy during the quarter.

Investor sentiment was positive for the quarter, dominated by the new tax reform bill and improved consumer confidence.  Although factor performance was somewhat mixed as high quality(A+) outperformed low quality (C&D) and large cap outperformed small cap, we noted that low yield and high beta continued to outperform. Of note, when quintiling the S&P 500, low yield outperformed high yield by 3.6%  and high beta outperformed low beta by 80 basis points for the quarter. More dramatic results were noted for the full year as low yield outperformed high yield by 23.5% and high beta outperformed low beta by 10.4%. These investor preferences were also apparent during the quarter in the sector performance of the broad market as top performers were the likely largest beneficiaries of the GOP tax reform legislation –such as Consumer Discretionary (+9.9%)and Financials (8.6%)-while the defensive, dividend friendly Utilities and Health Care sectors were the notable laggards, posting returns of  0.2% and 1.5%, respectively. Information Technology (+9.0%) also continued to post strong results for the quarter.

Performance

The fund ended the quarter with a return of 3.13% (A Shares at net asset value), while the Dow Jones Select Dividend Index and the S&P 500 posted returns of 6.19% and 6.64%, 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

  • Telecom Services was the fund’s top contributor posting a return of 7.2% (versus 3.6% for the sector in the S&P 500) as Telecom continued to rally after the FCC announced plans for a complete roll back of Net Neutrality as well as on the expectation that the sector will be a natural beneficiary of GOP tax-reform legislation
  • Energy added to performance, posting a return of 8.3% due to the rally in oil prices
  • Consumer Staples further contributed to performance, returning 4.7

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

Performance Detractors

  • Health Care was a drag on performance posting a -2.9% return as political uncertainty surrounding Health Care increased sector volatility
  • While high quality outperformed for the quarter within the broad market, low beta and higher yield underperformed which created a headwind for a defensive dividend strategy
  • The Utilities sector was a notable laggard in the fund, posting a return of -0.7%

How We Are Positioned

The final month of the calendar year closed out 2017’s year-long rally with the market’s risk-on posture still firmly in place heading into 2018. The major U.S. indexes all reached new highs in 2017 with December’s gains helping lift the Dow 25% on the year, the S&P 500 19% and the Nasdaq almost 28%. Outside the U.S., several international markets did even better, as a synchronized global recovery gained steam and boosted investor confidence, and a weaker U.S. dollar provided an additional tailwind for U.S. investors in foreign assets. Meanwhile, a domestic tax-reform deal struck and signed into law just before Christmas acts as a major catalyst to fuel U.S. equity returns as we enter 2018.

On the economic front, December data continued to fuel our expectations for 2018, as revised annualized GDP growth stayed above 3%, manufacturing, housing and consumer spending were all solid and both consumer and business confidence hovered around multi-decade highs. Even the Federal Reserve acknowledged the improvement as it raised the target rate for a third time in 2017 and significantly boosted its growth forecast for the year ahead.

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 fund to provide investors with the opportunity for a high dividend yield complemented with dividend growth. That dividend growth may help the fund both pursue its high yield and outpace inflation. Furthermore, stocks that consistently pay and increase their dividends have tended to have lower volatility, as reflected in the fund’s beta of .54 (Factset 3-year beta versus the S&P 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.