There are mounting signs that after a rough patch in the first half of 2020, dividend stocks are on the mend. Investors looking for best of breed payout stocks should prioritize balance sheet strength and quality, boxes checked by the FlexShares Quality Dividend Index Fund (NYSEArca: QDF).

QDF’s underlying benchmark targets management efficiency or quantitative evaluation of a firm’s deployment of capital and its financing decisions. By using a management efficiency screen, the index can screen out firms that aggressively pursue capital expenditures and additional financing, which typically lose flexibility in both advantageous and challenging partitions of the market cycle.

“Macro conditions are more favorable for investors looking to add dividend stocks to their portfolio, but it’s important to focus on the strength of individual companies’ balance sheets, concludes a note by Ned Davis Research,” reports Lawrence Strauss for Barron’s.

The QDF ETF Methodology

A quantitative, multi-factor model methodology that screens for quality and dividend yield may be a better way to target dividend payers efficiently. Specifically, FlexShares focuses on the core financial health of a dividend-paying company to address some of the shortcomings of other dividend-themed strategies, screening for management efficiency, profitability, and cash flow as a means of quality control.

Another QDF advantage is that the fund lightly allocates to sectors that are this year’s dividend offenders. For example, consumer discretionary, energy, industrials and real estate have delivered a spate of negative payout action this year, but those groups combine for less than 20% of QDF’s roster.

QDF YTD Performance

Additionally, low interest rates are compelling some investors to revisit dividend stocks.

“Near record low interest rates have made dividend stocks attractive options for income-seeking investors,” according to Ned Davis Research.

Due to aggressive monetary policies and quantitative easing programs to help support economic growth, fixed-income investors have witnessed equity yields outpace bond yields, and this trend is unlikely to revert any time soon.

QDF’s methodology goes beyond prosaic measures, such as dividend increase streaks. In fact, it can be argued that the FlexShares fund is far more stringent when it comes to sourcing reliable dividend growth.

Dividends have been a historical driver of overall returns for investors. Looking at the Russell 1000 benchmark, dividends have contributed to 2.76% of the index’s total return since its inception. While investors can still augment their portfolio through dividends, it is also important to be selective in a bid to focus on areas of strength.

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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.