Dividend yields often tempt, particularly when they’re high and interest rates are low. Yet dividend growth stocks usually prove durable, and investors can embrace that concept with 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.
“Growers typically don’t boast burly yields like yielders do, though they have their advantages. Notably, companies that regularly boost their dividends are usually profitable and financially healthy,” writes Morningstar analyst Susan Dziubinski.
QDF: The Right Recipe for Portfolio Growth?
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.
QDF’s focus on a company’s financial health is particularly relevant at a time when many companies took on debt simply to survive in the first half of 2020.
“As such, these companies generally show some resilience during market downturns. Further, dividend-growth stocks can provide some inflation protection,” according to Morningstar.
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. The ETF emphasizes the quality factor, of which a company’s ability to generate free cash and dividend growth and stability are integral tenants. Another element that has been critical to QDF’s success is the emphasis on management efficiency and a company’s ability to generate cash. Company stocks that issue high dividend yields can be masking their distressed books or may not be sustainable and are heading for dividend cuts. Consequently, these quality dividend ETFs try to limit the impact of these value traps by requiring a history of sustainable dividend growth.
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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.