Dividends are expected to increase again this year, but for investors looking for truly dependable dividend growth while skirting risky high-yield names, a quality approach is advisable. Enter the FlexShares Quality Dividend Defensive Index Fund (NYSEArca: QDEF).

QDEF offers dividend growth potential and security due to FlexShares’ proprietary dividend quality scoring methodology.

The Dividend Quality Score process is designed to maximize quality and yield while putting several diversification controls into effect through its selection and weighting process. FlexShares’ multi-faceted dividend quality score examines companies based on three factors when determining its dividend quality indexing methodology.

“QDEF is one of my favorite ETFs. The fund’s index scours the universe of dividend-paying stocks by looking at factors, such as profitability, cash flow and management efficiency, to assign an overall dividend quality score to each,” reports David Dierking for TheStreet.com. “Those with the lowest scores are eliminated and all remaining qualifying stocks are then optimized into a high quality, high yield portfolio that has a beta between 0.5 and 1.0.”

Qualifying The QDEF Benefits

The $503.3 million QDEF holds 162 stocks with a trailing 12-month dividend yield of 2.41%, well excess of the S&P 500 and 10-year Treasuries. The FlexShares fund allocates almost 21% of its weight to the technology sector, above-average allocation to that sector among dividend funds.

FlexShares’ multi-faceted dividend quality score examines companies based on three factors when determining its dividend quality indexing methodology.

QDEF’s profitability score is also taken based on a firm’s relative competitive advantage across several metrics. Firms with wider margins typically are better positioned to expand compared to those with tighter margins.

Lastly, cash flow provides a better understanding of liquidity levels for a company. A firm that does not meet its debt obligations and day-to-day liquidity needs are likely to be poorly positioned to take advantage of future opportunities or have a financial cushion during downturns.

“The final product ends up displaying a lot of the characteristics of a low volatility, value-oriented portfolio – ideal if the economy and the markets turn sideways – while the high yield is an added bonus,” according to TheStreet. “The yield premium on QDEF has historically been in the 0.75-1.00% range, which is where it is right now – 2.65% for QDEF vs. 1.68% for the S&P 500.”

QDEF is up 1.60% to start 2020.

For more information on dividend-generating ideas, visit our dividend ETFs category.

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.