Undoubtedly, 2020 is proving to be a rough year for dividend investors, but the FlexShares Quality Dividend Index Fund (NYSEArca: QDF) is an example of ETF that emphasizes dependability and quality while steering investors away from potential trouble spots.
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.
In any environment, a fund’s sector exposures matter. With the $1.37 billion QDF, is light on this year’s dividend offending sectors as consumer discretionary, energy and real estate combine for just 17% of the fund’s weight, according to issuer data.
Conversely, technology and healthcare stocks combine for 43.50% of QDF’s roster and those have been steady dividend growth destinations this year. QDF’s more than 30% allocation to technology is one of the highest to that sector among all dividend ETFs.
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.
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.
“Investors often take a flawed approach to evaluating dividend investments, by focusing on the dividend’s longevity and growth over time,” according to FlexShares. “This approach doesn’t necessarily translate to a sustainable yield going forward and may weigh too heavily to a specific sector. We’ve seen this strategy harm investors amid the dividend cuts and suspensions due to Covid-19. The FlexShares Quality Dividend ETF (QDF) offers investors a well-diversified portfolio of high-quality, dividend-paying companies, by focusing the analysis on cash flow, profitability, and management efficiency.”
QDF’s quality focus is important. Quality should not be conflated with low volatility, but there are times when quality stocks display low volatility traits. That was the case during the fourth quarter of last year’s market swoon, indicating that the quality factor can provide some protection during times of elevated market stress.
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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.