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 where a company’s ability to generate free cash, dividend growth and stability are integral factors. The ETF 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.
Importantly, QDF skirts the risks associated with owning high dividend stocks, an important trait for investors looking for sustainable, long-term dividend growth.
“This fund strives to sidestep this risk by balancing profitability and yield. If a stock is more profitable, it should be able to maintain its dividend during a market downtown or raise its payout ratio in the future. Although this fund’s profitability tilt helps it avoid the riskier, highest-yielding stocks, its yield has consistently topped the category average by 30%,” said Morningstar in a recent note.