Federated Strategic Value Dividend Fund (IS) SVAIX

Share Classes Product Type Asset Class Category
Mutual Fund Equity Large Cap
As of 06-30-2017

Highlights

  • Federated Strategic Value Dividend Fund (A Shares) provided a 30-day SEC yield of 3.0% and a gross weighted average dividend yield of 4.1% at quarter end.
  • There were five dividend increases during the quarter courtesy of Southern, Procter & Gamble, Exxon Mobil, General Mills and Omega Healthcare, which increased the dividend payments by 3.6%, 3.0%, 2.7%, 2.1%, and 1.6%, respectively. This was the fourth dividend increase in the rolling one-year period for Omega Healthcare, bringing the cumulative increase to 8.6%.  For the rolling one-year period, 33 companies raised their dividend, accounting for 36 increases overall.
  • Although investors did not favor a high-quality dividend approach as high-beta, low-yield cyclical names outperformed, the fund (A shares at NAV) still provided an attractive 3.1% quarterly return.

Looking Back

The fund remained committed to its goals of delivering high dividend income and moderate dividend growth to investors as it ended the quarter with a 30-day SEC yield of 3.0% and a gross weighted average dividend yield of 4.1%. This bested 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 3.6% 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 15 of its 38 holdings increase their dividend distributions.  Additionally, National Grid declared a special dividend of .84375 British pounds per existing ordinary share or $5.4224 U.S. dollar per American Depository Share, paid on June 2, 2017.  Looking at a longer time frame, 33 companies within the fund raised their dividends, accounting for 36 increases in the trailing 12 months.

Investor preferences oscillated between “risk-off” and “risk-on” during the quarter, but the overall period was most impacted by the high-beta chase that gained momentum in June.  In fact, when quintiling the S&P 500, high beta outperformed low beta by 2.3% and low-dividend yield outperformed high-dividend yield by 5.9%.  While these factors are not conducive to a high-quality dividend strategy, the fund kept pace with the broad market.

Performance

Federated Strategic Value Dividend Fund ended the quarter with a return of 3.1 % (A Shares at NAV), while the Dow Jones Select Dividend Index and the S&P 500 posted returns of 2.1% and 3.1% 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 fund’s U.K. holdings (15.0% average weight), which posted a 6.2% total return. U.K. performance was driven by superior returns from Vodafone and AstraZeneca, which posted returns of 13.0% and 8.6%, respectively.
  • Health Care contributed positively to performance with an 8.1% return. The Senate’s health care bill, if passed, is viewed as potentially positive for Pharmaceutical companies as various fees and taxes assessed to the industry could be eliminated.
  • Consumer Discretionary contributed positively to performance propelled by a sole holding, McDonalds, which surged 19% in the quarter. Additionally, Consumer Staples, which posted a 3.5% return (double the 1.6% sector return in the broad market), added to performance, attributable to Coca-Cola and tobacco names Philip Morris and Altria.

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

Performance Detractors

  • High yield and low beta underperformed during the quarter, which challenged a high-yield dividend strategy.
  • Energy was the fund’s noted laggard (albeit with a -1.3% return versus -6.4% return in the broad market) as oil prices declined due to concerns that rising U.S. supplies may offset cuts made by OPEC.
  • Telecomm detracted from performance as AT&T and Verizon posted declines of -8.1% and -7.3% when their stock prices were negatively affected by the recent competitive pressures within the U.S. wireless market.

Looking Ahead

The economic backdrop appears to be stable as economic growth has advanced in the U.S. and has showed moderate improvement in China and Europe.  The question is whether this supportive environment will continue. The combination of very low volatility, both in the equity and bond markets, with uncertainty over what Washington will or won’t do is weighing on investors, with the potential for a ripple or two if there are any surprises—whether geopolitical or economic.  Investors should remain cautious of unpredictable political outcomes, global politics and the pace of U.S. tightening.

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 can 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 .61 (Wilshire 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.