Federated Strategic Value Dividend Fund (IS) SVAIX
September saw the return of volatility as the major equity indices experienced significant daily swings and 10-year Treasury yields vacillated from a low of 2.34% at the end of August to a high of 2.63% in mid-September, only to end the month between the two extremes. Both the Dow and the S&P 500 closed down on the month after trudging to new highs in mid-September.
The back-and-forth to some degree reflected the economic news, which generally exhibited more strengthening off winter’s weakness but with scattered disappointments. Back-to-school spending and auto sales were robust, and second-quarter GDP was revised up again to 4.6%. But reports also suggested moderating gains in payroll employment and manufacturing, a slippage in consumer confidence and a mixed outlook for housing, where new home sales jumped but existing home sales fell and price increases decelerated.
While the geopolitical winds shifted a bit from Ukraine to the Middle East, international investors appeared more preoccupied with reports of further slowing in the economies of Europe and China. Back home, the Federal Reserve (the Fed) remained on center stage. Its much-anticipated September meeting made no change in policy language regarding the timing of changes to the federal funds target rate, but a slight tweak to rate forecasts indicated the increases may be slightly larger than previously thought when they do come. The outcome seemed to be open to interpretation in the marketplace, with equities viewing the Fed as somewhat more dovish and fixed-income investors viewing it as somewhat more hawkish.
Performance & Strategy
Federated Strategic Value Dividend Fund, dedicated to providing investors with dividend income, dividend growth, and lower downside risk, finished the third quarter of 2014 with a 30-day SEC yield of 3.2% and a gross weighted average dividend yield of 4.3%. The fund’s yield stands well above the yield of the 10-Year U.S. Treasury bond (2.5%), 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 high yield, as six of the portfolio’s holdings raised their dividends in the third quarter alone. The most notable dividend increases came courtesy of Altria Group, Inc., Philip Morris International Inc. and ConocoPhillips, which raised their dividend payments to shareholders by 8.3%, 6.4% and 5.8%, respectively. All three of these companies have paid a dividend consecutively every year for the past 50 years. For the trailing 12 months, 35 companies within the portfolio raised their dividend, accounting for 38 increases overall. These increases have translated into dividend growth, excluding the Vodafone special dividend, of 5.4% over the same period. The investments in the portfolio have a strong history of increasing their dividend, as 34% have raised dividends each year for the past 20 years, 26% have done so for the past 30 years and 8% have commendably done so each year for the past 50 years.
Federated Strategic Value Dividend Fund had a total return of -2.8% (Class A Shares at net asset value) for the third quarter of 2014. The S&P 500 Index advanced 1.1% and the Dow Jones Select Dividend Index lagged behind with a return of -3.2% for the quarter. With the jump in volatility in the quarter, it was not surprising to see low-beta, large-cap, high-quality stocks outperform, suggesting increased caution among investors. Further, long-term Treasury bonds had the strongest performance among asset classes with a 2.8% total return. Contrary to the defensive tilt in the marketplace, the portfolio faced a significant headwind as investors flocked to low-dividend-yielding investments. In fact, when quintiling the U.S. market, low-yielding stocks exceeded high-yielding stocks by 4.9% as the market considered the upcoming expiration of quantitative easing and an eventual increase in the federal funds rate. As a result, the largest laggards in the broad market were the dividend-friendly Energy (-8.7%) and Utilities (-4.1%) sectors. As of the date of this writing, the fund’s portfolio had a total combined weight in these two sectors of over 39%, as they both offer vast opportunities for substantial dividend yield and growth. Health Care and Information Technology were the outperformers in the broad market, posting returns of 5.4% and 4.7%, respectively for the quarter.
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.
In the portfolio, the notable laggard was the Energy sector, which posted a return of -9.1%. Energy was down as a whole for the quarter triggered by declining oil prices based on concerns that global demand was slowing. Notable underperformers within Energy included, BP (-15.3%), ConocoPhillips (-10.1%), Total (-9.1%), and Royal Dutch Shell (-7.9%). BP faced additional headwinds from continued legal issues. Utilities also hurt performance, posting a return of -2.1%, as the sector underperformed for the quarter but outperformed year-to-date. Consumer Staples helped performance, posting a return of 0.7% in the portfolio driven by Altria, which advanced 10.6% during the quarter on the announcement of its generous dividend increase.
The international investments in the portfolio hurt performance, returning -7.1% in the period. The international underperformance was driven by European Union weakness from deflation fears and pound sterling weakness leading up to the Scottish independence referendum.
Click on the Portfolio Characteristics tab for the fund’s top 10 holdings.
Regardless of geopolitical uncertainty and volatility in the markets, Federated Strategic Value Dividend Fund remains grounded in its steadfast approach of seeking to provide investors with a high-yielding portfolio that offers dividend growth and long-term total returns. The portfolio continues to be attractively positioned to seek superior long-term total returns while providing lower downside risk as evidenced by the portfolio’s low beta of 0.58 (Wilshire three-year beta versus the S&P, calculated using the monthly return). So whether an investor is looking for dividend income that rises, a way to pursue superior long-term returns or a strategy that largely avoids the cyclicality of the market, Federated Strategic Value Dividend Fund presents an advantageous opportunity.