Some dividend stocks are defensive. Others exhibit quality traits. Some feature both characteristics. For investors searching for a basket of such names under one umbrella, the FlexShares Quality Dividend Defensive Index Fund (NYSEArca: QDEF) is an ETF to consider.
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.
What makes QDEF relevant in today’s climate chock full of negative dividend action is what it excludes. For example, the consumer discretionary and energy sectors are two of the worst sectors this year in terms of dividend cuts, but QDEF allocates just 13% of its weight to those groups.
QDEF allocates 12% of its weight to financial services stocks and while there’s plenty of talk the Federal Reserve may force banks to rein in payouts, the bulk of the fund’s holdings from that sector are insurance companies that have steady dividends and aren’t beholden to the Fed when it comes to shareholder rewards.
FlexShares’ multi-faceted dividend quality score examines companies based on three factors when determining their 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.
Importantly, QDEF devotes 23.35% of its weight to technology, one of this year’s most reliable dividend sectors.
For years, technology was the not first sector investors thought of when they thought of dividends. The largest sector weight in the S&P 500 is changing that and that change has been a boon for an array of ETFs. In fact, in dollar terms, technology is now the largest dividend-paying sector in the U.S.
Technology companies historically did not pay out dividends since it would hint that the firm didn’t have anything new to reinvest in to further support their breakneck growth. While this growth-oriented model has worked over the years, the market environment has shifted.
For more on multi-asset strategies, please 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.