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The major equity indexes slipped in June, as generally better-than-expected data on the U.S. economy gave way to worries late in the month over a possible Greek default, exit from the euro or both. The bulk of the monthly decline, which saw the S&P 500, Dow and Nasdaq fall a respective 2.1%, 2.2% and 1.6%, came on June 29, when a strong risk-off trade sent global equity markets tumbling as the Greek issue came to a head. June’s losses were enough to push the S&P to a virtually flat total return for the quarter.
Questions over Greece’s fate, as well as concerns over a potential default by Puerto Rico on its bonds, masked a month that all but confirmed a spring rebound from winter’s detrimental mix of bad weather, West Coast port shutdowns and a stronger dollar. Nonfarm payrolls in May posted their largest gain in five months, with a much stronger-than-expected increase of 280,000 jobs. Elsewhere, May existing sales topped expectations, new home sales rose at their fastest pace in nearly eight years and pending home sales—a gauge of future final sales—hit a nine-year high, all fueled by a growing share of first-time buyers. In addition, consumer spending accelerated, with May personal consumption expenditures up the most in nearly six years, led by autos and other big-ticket durable goods. Manufacturing activity was more mixed, with various regional and national gauges indicative only of modest improvement.
Still, the overall portrait of June’s economy was one that had put winter behind it. Most Wall Street forecasters are predicting a stronger summer and second half after yet another poor start to the year. But it remains to be seen if this will be enough to overcome market concerns about geopolitical eruptions such as Greece and Puerto Rico that have driven up volatility.
In spite of the recent commotion in the markets precipitated by uncertainty in Greece and the Federal Reserve’s (the Fed’s) future interest-rate plans, Federated Strategic Value Dividend Fund remained focused, as always, on its goal of providing investors with a high-dividend yield complemented by dividend growth. At the end of June, the portfolio’s 30-Day SEC yield was 3.2% (A Shares at maximum offering price) and the gross weighted average dividend yield measured 4.4%, higher than that of the broad market S&P 500 Index (2.1%) and the Dow Jones Select Dividend Index (3.8%), which aims to reflect the domestic dividend-paying universe. During the second quarter, the portfolio also realized seven dividend increases. The most notable of these increases came from Williams Companies, Johnson & Johnson and Kinder Morgan as they raised their dividends by 10.3%, 7.1% and 6.7%, respectively. This is the third increase over the past twelve months for both Williams Companies and Kinder Morgan, which brings their cumulative trailing twelve month dividend raises to 14.3% and 11.6%, respectively. For Johnson & Johnson, its April 2015 dividend hike marked the 53rd consecutive year that the company has raised its dividend. For the overall 35-stock portfolio, there have now been 18 dividend increases year-to-date at the halfway point of 2015.
During the second quarter of 2015, Federated Strategic Value Dividend Fund produced a total return of -0.7 %( Class A Shares at net asset value). Over the same time frame, the S&P 500 Index and Dow Jones Select Dividend Index returned 0.3% and -2.6%, respectively. A “risk on” environment was present for most of the quarter, as investors favored low-yielding, high-beta, low-quality equities. In fact, when quintiling the broad U.S. market, stocks in the lowest-yielding quintile outperformed stocks in the highest-yielding quintile by 2.2%. Similarly, stocks in the highes-beta quintile led stocks in the lowest-beta quintile by 5.6%. And regarding quality, stocks with a “C” quality rating outpaced stocks with an “A+” quality rating by 6.2%. Such stocks are not conducive to a dividend-oriented investment strategy and consequently, the worst-performing sector in the broad market was the defensive, dividend-rich Utilities space, which returned -5.8%. Industrials (-2.2%) and Energy (-1.9%) also lagged, while the top-performing sectors were Health Care (2.8%) and Consumer Discretionary (1.9%).
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 Class A Shares. If included, it would reduce the performance quoted.
Click the Performance tab for standard fund performance.
Within the portfolio, the top-performing sectors were Telecom Services (5.8%) and Consumer Staples (1.3%). Within these sectors, the portfolio was led by the advance of Vodafone (14.4%), AT&T (10.4%) and Reynolds American (9.4%). In the Energy sector, Williams Companies also added to overall performance, posting a return of 10.6%. Williams Companies’ share price rose notably after news of a potential buyout from Energy Transfer Equity L.P. REITs and Utilities were the worst-performing areas for the portfolio, returning -10.1% and -3.2%, respectively. REITs and Utilities experienced short-term price pressure due to speculation around when the Fed might raise rates, but the portfolio’s holdings in these industries are, nonetheless, supportive of an income-oriented investment strategy, evidenced by their average dividend yields of 5.4% and 4.8%.
Click on the Portfolio Characteristics tab for the fund’s top 10 holdings.
The second quarter was a turbulent period for the markets, reminding investors of the importance of investing in a portfolio characterized by stability. The portfolio’s unchanging investment strategy looks beyond short-term market noise and focuses instead on the long-term drivers of total return. Historically, dividend yield and dividend growth have been those drivers, which is why the portfolio is designed to invest in businesses with the ability and willingness to pay and raise their dividends over time. The portfolio’s holdings not only provide a substantial level of rising income, but they also tend to offer lower downside risk since the portfolio’s investments naturally tend to be mature, large-cap global companies. The inherent defensive quality of these stocks is demonstrated by the portfolio’s low beta of just 0.74 (Wilshire 3-year beta versus the S&P calculated using the monthly return) versus. the S&P 500. So as the broad market constantly ebbs and flows in its unpredictable fashion, Federated Strategic Value Dividend Fund seeks to provide a steadfast, objectives-based investment approach that is designed to provide a meaningful source of income, growth in that income that can offset inflation, lower downside risk characteristics and a long-term investment approach positioned to outperform the broad market. As such, the portfolio provides a compelling investment opportunity for a wide array of investors.