The quality factor is often associated with dividends and there are plenty of exchange traded funds that offer investors exposure to a combination of quality and dividend-paying stocks. That group includes the FlexShares Quality Dividend Index Fund (NYSEArca: QDF).
QDF emphasizes the quality factor, of which a company’s ability to generate free cash and dividend growth and stability are integral tenants. Another element that has been critical to QDF’s success is the emphasis on management efficiency and a company’s ability to generate cash.
Company stocks that issue high dividend yields can be masking their distressed books or may not be sustainable and are heading for dividend cuts. Consequently, these quality dividend ETFs try to limit the impact of these value traps by requiring a history of sustainable dividend growth.
QDF features a heavy cyclical tilt, which can be a positive trait in advance of higher U.S. interest rates. The financial services, technology and consumer discretionary sectors combine for nearly half of the ETF’s weight. Conversely, QDF’s exposure to the rate-sensitive telecom and utilities sectors is relatively modest as is the fund’s allocations to the downtrodden energy and materials groups.