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Concerns over energy, manufacturing and China helped snuff out a budding Santa Claus rally, with the three major domestic equity indices closing down on the month and the big two—the S&P 500 and the Dow—also down for the year. December’s performance was representative of the entire year, as encouraging news on jobs, autos and consumers once again battled unsettling news on oil prices, manufacturing activity and a slowing China, leaving investors uncertain about the future.
For its part, the Federal Reserve (Fed) wasn’t uncertain. It finally initiated its first tightening cycle in more than nine years, lifting the target federal funds rate a quarter-point off the 0%-to-0.25% range/floor where it had sat since December 2008. In a sign it sees the economy strengthening in the New Year, the Fed signaled four similar rate hikes for 2016, a move the market appears to be taking with a grain of salt. Worried a global economic slowdown and the commodity complex’s collapse will make it difficult for the policymakers to reach their 2% inflation target, the futures market currently is pricing in lower expectations for 2016.
Federated Strategic Value Dividend Fund has remained focused on its goal of providing investors with a high-dividend-yield-portfolio complemented by dividend growth. The portfolio finished the quarter with a 30-day SEC yield of 2.9% (A Shares at maximum offering price) and a weighted average dividend yield of 4.3%, greater than both the Dow Jones Select Dividend Index (3.9%) and the S&P 500 Index (2.2%). The Dow Jones Select Dividend Index aims to represent the domestic dividend-paying universe while the S&P 500 Index is widely used to represent the broad market. In addition to its high yield, the 34-stock portfolio experienced 34 dividend increases during 2015, including eight in the fourth quarter. Some of the more notable dividend raises during the quarter came from Dominion Resources (8.1%), American Electric Power (5.7%) and McDonalds (4.7%).
For the fourth quarter, the portfolio posted a total return of 5.6% (Class A Shares at NAV). During the same time period, the Dow Jones Select Dividend Index produced a total return of 4.4% and the S&P 500 Index had a total return of 7.0%. The volatile market ride of 2015 continued in the fourth quarter as investor preferences reversed not once, but twice. In the third quarter investors had sought safer havens with defensive securities; October and November proved to be the opposite as investor appetite for risk surged in anticipation of a December rate hike. By December, it was evident that positive investor expectations succumbed to ongoing concerns regarding oil prices, weakness in China and tensions in the Middle East. Ultimately, these macro concerns dwarfed the market’s anticipation of the long-awaited rate hike, which ended up being more or less a non-event for dividend-friendly portfolios.
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.
Notwithstanding the heightened volatility during the quarter, the portfolio still posted strong performance with positive returns across all sectors. Consumer Staples (+8.5%) and Consumer Discretionary (+20.8%) led the way. Within Staples, Kimberly Clark and Phillip Morris International outperformed, posting returns of 17.6% and 12.1%, respectively. The sole investment within Discretionary, McDonalds, returned 20.8% due to improved investor confidence, driven by the addition of new premium sandwiches and the implementation of all-day breakfast. Health Care (+5.4%) also contributed positively to performance, driven by Johnson & Johnson and GlaxoSmithKline as the two companies announced positive Phase 3 results for a late-stage rheumatoid arthritis drug that they share.
During the quarter, the greatest laggard was the Energy sector, with portfolio holdings posting a return of 0.4%. The laggard in the portfolio, a 1.1% exposure to Kinder-Morgan, posted a return of -39.6%. The investment was ultimately sold due to concerns that a dramatic change in capital market funding prospects created material risk to the dividend. Subsequently, Kinder-Morgan did cut its distribution. Outside of Energy, negative performance was also noted in Telecom Service provider BCE (-4.6%) as news of M&A activity elsewhere in the Canadian market may result in an increase in competition.
Click on the Portfolio Characteristics tab for the fund’s top 10 holdings
Our dividend-focused investment style not only seeks to present investors with a cash flow stream today, but also strives to position the portfolio for long-term modest capital appreciation through dividend growth. Historically, dividend yield and dividend growth have been the primary drivers of total return. In addition, consistent dividend-paying and dividend-increasing stocks have exhibited considerably less volatility than the broader market—as reflected in the portfolio’s beta of 0.78 (Wilshire 3-year beta versus the S&P calculated using the monthly return).