Federated Strategic Value Dividend Fund (IS) SVAIX
Stocks vacillated through much of March, with the back-and-forth in many ways mirroring what was a murky month. The rough winter continued to wreak havoc with economic data. Federal Reserve (the Fed) policymakers sent seemingly conflicting messages: that tightening may come sooner than expected, but also that key policy bellwethers-the labor market and inflation-remained well off desired levels. Overseas, Russia annexed part of Ukraine, then signaled it was done rattling its saber-for now. In short, it was hard to get a clear read on which way the economy, the Fed and the world may be headed.
There were signs by month’s end that spring could bring some lift to an economy that, after expanding at a 2.6% rate the final three months of 2013, was expected to have slowed significantly in the first quarter. In March, the four-week average of initial jobless claims hit a six-month low, prompting projections for March nonfarm payrolls to top 200,000 after rising a better-than-expected 175,000 in February. The Conference Board’s confidence gauge reached its highest level since January 2008 and the University of Michigan’s final take on sentiment for the month rose from its initial read. Also, the six-month outlook for capital expenditures jumped in the Richmond, New York and Philadelphia Fed regional surveys-sluggish capital expenditures have been a concern.
Still, housing continued to struggle to get out from under winter’s wrath. It was expected to be a growth driver this year, but after steadily moving higher through the middle of 2013, new home sales have leveled, falling 3.3% in February. February pending home sales, a good indicator of future existing home sales, also fell more than expected. Prices did moderate but still continued to rise, with the Case-Shiller and FHFA indices reaching levels last seen in 2008. The good news is banks are loosening standards, loans for residential construction are picking up and mortgage rates have steadied-events that could aid buyers and builders as the market enters a seasonally strong period.
Dedicated to providing investors with a high and growing income stream, Federated Strategic Value Dividend Fund provided a 30-day SEC yield of 2.8% (Class A Shares) and a gross weighted average dividend yield of 4.3% at quarter end (excluding the Vodafone special dividend). This substantially exceeded not only the broad market represented by the S&P 500 Index with its 2.0% yield, 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. Beyond its high yield, Federated Strategic Value Dividend Fund saw impressive dividend growth as 12 holdings raised their dividend in the first quarter. The most notable increases came courtesy of PepsiCo, Lorillard, Coca Cola, General Mills and Reynolds American, with increases of 15.4%, 11.8%, 8.9%, 7.9% and 6.3%, respectively. The increase from Reynolds was the company’s second dividend raise in the trailing twelve months, amounting to a cumulative increase of 13.6%. For the trailing 12 months, 35 companies within the portfolio have raised their dividend, accounting for 37 increases overall. Additionally, Vodafone issued a special dividend, valued at about $17.34 per Vodafone ADR Share, consisting of Verizon stock and cash. Touted as the largest special dividend in history, this special distribution added about 2.0% to the overall yield of the portfolio for the trailing 12-month period.
For the first quarter of 2014, Federated Strategic Value Dividend Fund produced an impressive total return of 3.8 % (Class A Shares at NAV), outperforming both the S&P 500 Index (1.8%) and the Dow Jones Select Dividend Index (3.7%). As 2014 began, “risk on” characteristics were still dominant. During the quarter, low-market cap outperformed high-market cap by 3.7%, and low quality outperformed high quality by 4.6% and the high-beta trade started to unwind. As investors started to steer away from riskier assets, the previous low-yield preference reversed and investors looked for a haven for their investments. From a sector standpoint, Utilities (+10.1%) and Health Care (+5.8%) outperformed in the broad market while the cyclical Discretionary (-2.8%) and Industrial (0.1%) sectors lagged. Utilities and Health Care were the portfolio’s top-performing sectors, posting returns of 7.8% and 7.4%, respectively, for the quarter. Within Utilities, PPL, Dominion and SSE drove performance, posting returns of 11.4%, 10.7%, and 10.1%, respectively. For Health Care, Eli Lilly, Merck and AstraZeneca all posted double-digit returns for the quarter and were the top-three performers in the portfolio.
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 fund’s international investments positively contributed to performance, as collectively the foreign holdings returned 3.8% for the quarter. This was driven by the portfolio’s French and British holdings which returned 8.1% and 3.3%, respectively. Returns were driven by AstraZeneca (+12.4%), Total (+8.1%) and National Grid (+5.0%), which all posted superior returns for the quarter.
Click on the Portfolio Characteristics tab for the fund’s top 10 holdings.
The fund remains committed to seeking to invest in strong high-quality companies that are committed to paying and increasing their dividends. The portfolio’s combination of high-yield and dividend growth potential may provide investors with a generous and unfaltering cash stream that increases over time. Historically, dividend yield and dividend growth have been the primary drivers of total return and consistent dividend-paying and increasing stocks have exhibited less volatility than the broad market. This is evidenced by the portfolio’s low beta of 0.49 (Wilshire three-year beta versus the S&P calculated using the monthly return). If an investor is looking for definitive dividend income that rises, a way to achieve superior long-term total returns or a fund that largely avoids the cyclicality of the market, Federated Strategic Value Dividend Fund presents an opportunity.