Federated Strategic Value Dividend Fund (IS) SVAIX
December capped a year-long rally in U.S. stocks that saw the major indexes reach record highs. The advance was fueled by a domestic economy that, nearly five years after recession, finally appeared to be gaining enough traction to allow the Federal Reserve (the Fed) to begin easing off the gas.
No less than the Fed served notice of a strengthening economy, citing moderate growth, improvements in manufacturing, housing, business investment, consumer spending and the labor markets as reasons to begin a modest $10 billion reduction in its $85 billion of monthly asset purchases. Reinforcing the notion that the Fed was feeling better about the economy’s course was the decision to announce its tapering move after the mid-December’s policymakers’ meeting. We note it was five years ago to the month that the Fed unveiled its unprecedented easing amid the worst recession since the Great Depression.
The Fed’s taper came on the heels of the Commerce Department report putting the increase in real final third-quarter GDP at a much better-than-expected 4.1%, the most in nearly two years, not only on inventory building but also on robust increases in consumer and business spending, critical components for continuing growth. Other reports on the month reflected accelerating manufacturing, housing and construction activity, rising auto sales and rebounding consumer confidence. Coinciding with this more robust economic portrait was a Fed that, despite easing off the gas, also signaled it will continue to hold short-term interest rates at record lows, providing an inexpensive financing backdrop for an economy that appeared set to spend and invest more.
Performance & Strategy
For the fourth quarter, Federated Strategic Value Dividend Fund achieved its goals by maintaining a generous yield and moderate dividend growth, which are drivers of attractive long-term total returns for investors. The fund finished the fourth quarter with a 30-day SEC yield of 2.91% for Class A Shares, and a 4.4% gross weighted average dividend yield, which exceeded the yield of the 10-Year US Treasury Bond (3.0%), the broad-market S&P 500 Index (2.0%), and even the Dow Jones Select Dividend Index (3.6%) which attempts to represent the domestic dividend-paying universe. Dividend growth helped the portfolio sustain its yield, as eight of the portfolio’s holdings raised their dividends in the fourth quarter alone. The most notable increase came courtesy of Dominion Resources (+6.7%). In total, the 38-stock portfolio has received 32 dividend increases during 2013. Of the 38 stocks in the portfolio, 32% have raised their dividends each year for the past 20 years; 26% for the last 30 years and 8% have commendably done so for the last 50 years.
Federated Strategic Value Dividend Fund produced a total return of 6.7% (Class A Shares NAV) for the quarter, and a 21.5% return (Class A Shares at net asset value) for the year. In the fourth quarter, the broad-market S&P 500 Index returned 10.5% and the Dow Jones Select Dividend Index returned 8.5%.
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.
The quarter was a continuation of the theme that was in place for much of the year with the markets in a “risk on” state creating a headwind for our strategy as low-quality, high-beta, low-yielding cyclical securities were in favor. Amongst equities, low-quality stocks outperformed high-quality stocks by 1.2%, high-beta stocks eclipsed low-beta stocks by 4.8%%, and the lowest-yielding stocks exceeded highest-yielding stocks by 5.2%. For the overall quarter, the sectors that outperformed in the broad market were Industrials (+13.5%) and Information Technology (+13.3%). The portfolio has no exposure to these cyclical sectors, as there are very limited dividend opportunities and they do not fit our strategy with their cyclical nature. Utilities (2.8%) and Telecomm (5.5%) were the worst performers in the broad equity market as investors shied away from safer defensive stocks in favor of riskier assets. From an absolute standpoint, the fund did quite well, generating positive returns across all sectors with the exception of Financials (Real Estate Investment Trusts), which is comprised of only one REIT. The portfolio’s top performer was Health Care, which posted a return of 10.5%. This superior performance was driven by Abbvie and AstraZeneca, posting returns of 19.1% and 13.7%, respectively. Telecomm and Energy also helped performance, generating returns of 8.0% each for the quarter. The portfolio remains positioned to pursue positive income streams, reliable dividend growth and lower downside risk regardless of market trends.
The portfolio’s international investments positively contributed to performance, as collectively the foreign holdings returned 9.3% for the quarter. This was driven by the UK which returned 10.0% as BP (+16.6%), AstraZeneca (+13.7%), Vodafone (+14.0%), National Grid (+12.5%), and Royal Dutch Shell (+10.7%) all posted double-digit returns.
Click on the Portfolio Characteristics tab for the fund’s top 10 holdings.
Federated Strategic Value Dividend Fund had a successful fourth quarter as it focused on maintaining an impressive dividend yield and modest dividend growth while maintaining a high quality portfolio. The fund will not alter its strategy nor compromise the quality of the portfolio to short-term market trends, but instead will continue to invest in strong, long-standing companies which provide a robust and growing dividend stream. The portfolio seeks to provide investors with a generous and unfaltering cash flow stream, and the potential for dividend increases among the portfolio’s holdings allow that income stream to increase over time. This dividend-focused investment style not only presents investors with the opportunity for a substantial cash flow stream, but it also attractively positions the portfolio for the long term. Historically, dividend yield and dividend growth have been important drivers of total return, and consistent dividend-paying and increasing stocks have exhibited considerably less volatility than the broad market as evidenced by the portfolio’s low beta of 0.46 (Wilshire 3-year beta versus the S&P 500 calculated using the monthly return). As such, Federated Strategic Value Dividend Fund can meet a wide range of investor needs, thanks to its dependable, steadfast dividend-oriented investment approach.