Actually, all of 2020 has been a time to identify the sturdiest dividend payers because negative payout action is proving to be an unfortunate yet prominent theme. The FlexShares Quality Dividend Defensive Index Fund (NYSEArca: QDEF) is one ETF investors can tap to avoid vulnerable dividend payers.
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.
Why QDEF Matters Now
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.
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 March market swoon, indicating that the quality factor can provide some protection during times of elevated market stress.
“Measuring a company’s core financial health makes it possible to evaluate whether it may increase (or need to decrease) its future dividends. With this approach, the reliance on publicly available financial data means new dividend payers can be evaluated similarly to stocks that have paid dividends for decades. By using several lenses to evaluate financial health, an investor can gain a strong sense of how well-positioned a dividend-paying company is for success, and how protected future dividends are under current market and economic environments,” according to FlexShares.
QDEF’s smart beta indexing methodology 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 screens out firms that aggressively pursue capital expenditures and additional financing.
By evaluating these different quality facets, FlexShares is better able to determine the likelihood that a company can issue sustainable dividend payouts and that’s vital to the QDEF thesis at a time when so many S&P 500 companies are paring or suspending dividends.
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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.