As companies find it harder to grow earnings in a slowing economy, exchange traded fund investors should focus on high-quality names to ride out this low growth environment. A focus on quality can pay dividends for investors, literally.
Dividend ETF investors who are seeking stability, along with exposure to the growing U.S. markets, should look to quality instead of chasing after yields. For instance, the FlexShares Quality Dividend Index Fund (NYSEArca: QDF), FlexShares Quality Dividend Dynamic Index Fund (NYSEArca: QDYN) and the FlexShares Quality Dividend Defensive Index Fund (NYSEArca: QDEF) are a group of smart-beta ETFs that focus on both quality and dividends.
QDF emphasizes the quality factor, of which a company’s ability to generate free cash and dividend growth and stability are integral tenants. QDF tries to reflect the performance of the Northern Trust Quality Dividend Index, which holds high-quality income-oriented U.S. companies with a targeted overall beta similar to the Northern Trust 1250 Index, or the parent index. QDF’s quality emphasis implies a safer payout and more room for potential dividend growth.
“The key is in the ETF’s focus on a company’s overall financial health as opposed to just strictly fundamental metrics like the payout ratio. The FlexShares approach looks at management efficiency, profitability and cash flow in order to create a proprietary dividend quality score. Non-dividend payers and companies in the lowest quintile get rejected immediately. The fund focuses on stocks in the highest quintiles while balancing dividend yields and putting diversification controls in place to fill out the portfolio,” according to ETF Daily News.