Don't Ditch Dividend ETFs if Taxes Rise | Multi-Asset Channel

There are concerns that if a blue wave materializes on Election Day, higher taxes will ensue. But this shouldn’t dent the case for dividends; investors shouldn’t be hasty in ignoring exchange traded funds such as the FlexShares Quality Dividend Index Fund (NYSEArca: QDF).

With quality investing durable regardless of political outcomes, investors shouldn’t cast QDF aside simply based on electoral outcomes.

“The Biden tax proposal envisions a hike in the corporate tax rate, from 21% to 28%. That much is clear,” according to BlackRock research. “What is less obvious, particularly when you consider the political sausage making that will precede an actual deal, are the ultimate details of a package. Every industry tends to have a different effective tax rate, i.e. the tax rate after deductions and tax credits. How these more nuanced expressions of the tax code evolve will determine how much more companies really pay.”

QDF for Quality Dividends

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.

QDF YTD Performance

Investors should consider quality dividend growth stocks that typically exhibit stable earnings, solid fundamentals, strong histories of profit and growth, commitment to shareholders, and management team convection in their businesses.

Dividends have added significantly to returns over time, contributing approximately 32% of the S&P 500’s total return since 1960. During the return-challenged 1970s, dividends made up nearly three-quarters of S&P 500 returns – while investors earned a cumulative total return of 77% from the S&P 500 in that decade, 60% of that 77% was from dividends.

After Election Day, QDF’s cyclical exposure could prove meaningful, too.

“The bottom line for investors is that an early and well targeted stimulus package can, at least in the near-term, lift markets higher,” notes BlackRock. “Under this scenario the biggest beneficiaries are likely to be many of the cyclical names and industries that have been outperforming since September. This does not suggest that higher taxes won’t ultimately matter; simply that a large stimulus package may be the key catalyst, at least for now.”

For more on multi-asset strategies, visit our Multi-Asset Channel.

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.