This Mutual Fund Offers Retirement Income Plus Outperformance

Is the crummy stock market tearing your retirement planning to shreds? Would you like relief in the form of a stock mutual fund that’s up 9.46% for the year, generates nearly triple the yield of the S&P 500 index and aims to soothe even jittery grandmothers among its shareholders?


If you answered yes, yes and yes, then check out $9 billion Federated Hermes Strategic Value Dividend Fund (SVAAX).

The fund’s year-to-date return compares to a 7.37% loss for the S&P 500 and a 0.91% setback on average for its large-cap value rivals tracked by Morningstar Direct, going into Wednesday.

Its trailing 12-month yield of 3.45% was 2.7 times larger than the yield generated by the popular SPDR S&P 500 ETF (SPY), which tracks the popular stock market bogey.

Retirement Planning That Prizes Income

When the market tilts away from the value-oriented stocks this fund favors, its rate of price appreciation can lag. For example, over the past 15 years its average annual total return was 5.94% vs. 9.91% for the S&P 500. That lagged 87% of its peer group.

Still, if income is a key theme in your retirement planning, slower growth may matter less than steady yield generation.

As for the fund’s holdings, don’t expect to find FAANG stocks (Meta Platforms (FB) predecessor Facebook, Apple (AAPL), (AMZN), Netflix (NFLX) and Google parent Alphabet (GOOGL)) with nosebleed market capitalizations or other megacap technology stocks.

In fact, don’t hold your breath expecting to see tech stocks at all. “We don’t have trillion-dollar market-cap companies with no dividends and no profits,” said Daniel Peris, who runs the fund along with Deborah Bickerstaff, Jared Hoff and Michael Tucker.

Of those, only Apple offers a dividend yield. It’s a scant 0.5%.

Dividends In A Weak Stock Market

Instead, the fund aims for stocks that pay dividends that are high and rising. As a result of their ability to do that, they also achieve price appreciation.

That approach is especially well suited to people focused on making income a keystone of their retirement planning. They’re also willing to trade off the fastest growth in return for high and rising income, Peris says. “We’re cutting the dividend check to grandma,” Peris said. “Our commitment is to make sure that grandma is getting the monthly check.”

The fund’s distributions come from holdings in well-established companies. “Our companies (which Peris does not comment on individually) are fairly mature,” Peris said “They have cash flows. They’re generally engaged in activities that are not speculative. They are in food, beverages, tobacco, household products. They are utilities, phone companies, integrated energy companies and miscellaneous other relatively low-risk businesses.”

Health care was the fund’s largest sector, with an 18.3% weighting as of Feb. 28. AbbVie (ABBV), whose pharmaceutical products treat cancer and other diseases, was the topmost holding of this fund that tries to be a friend for anyone focused on retirement planning.

Additional health-care holdings included pharmaceuticals drugmakers Pfizer (PFE), Merck (MRK) and Bristol-Myers Squibb (BMY) as of Jan. 31.

Current yields range from Sanofi‘s (SNY) 2.4% to 4.7% for Gilead Sciences (GILD). “We like health care for the same reason we’ve liked them for years,” Peris said, “They pay high and rising dividends.”

Among different varieties of health-care stocks, the fund has preferred “pharma because they are bigger dividend payers,” Peris said.

Energy Fuels This Retirement Planning Fund

The energy sector is another place this fund finds fuel to drive shareholders’ retirement planning.

Energy was the fund’s second largest sector. It had a 17.5% weighting. Holdings include integrated oil and gas firms and energy pipeline companies. Oil prices have soared since early December. “Energy pipeline companies offer a long-term and steady revenue stream,” Peris said.

None of the integrated firms was acquired amid the sector’s recent run up, Peris says. All have been in the portfolio for years.

In fact, the fund’s overall annual turnover rate is just 23% vs. 62% for all U.S. stock mutual funds.

Current yields by energy holdings are in a fairly tight range, from 3.3% for Chevron (CVX) to 5.9% for Enbridge (ENB), a Canadian gas distributor.

The fund’s highest yielding stock as of Feb. 28 was AT&T (T). Yield, then 8.2%, is now 5.7%. Vodafone Group’s 8.8% is now tops. Communications services — “phone companies,” as Peris calls them — comprised the fund’s fifth largest sector.

Consumer staples made up the fund’s third biggest sector, with a 16.9% weighting. Current dividend yields range from 2.7% from Coca Cola (KO) to 6.8% from British American Tobacco (BTI).

Yield: How High Is Too High?

How do you decide how much yield is too high? The optimal yield is the maximum a company can pay without hurting its own ability to pay for future needs, Peris says. “We try to maximize the net present value of each business. We want to get as much income as possible without creating downstream business problems.”

And why is the fund doing so well presently? A lot of investors, whether or not they’re focused on retirement planning, are seeking safe haven in the Steady Eddie stocks this fund owns. “This portfolio has a lot of defensive stocks: utilities, phone companies — which for years you could not give away — and lots of old stand-bys,” Peris said. “This is the type of stuff that, when outside risk is high and investors are spooked, investors decide there’s not a lot that’s wrong with these types of companies.”

Follow Paul Katzeff on Twitter at @IBD_PKatzeff for tips about retirement planning and actively run portfolios that consistently outperform.


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