Recent markets have proved one point very clearly: there are winning companies, and losing companies. So how do you maintain exposure while focusing on high-quality companies for the long term? High-quality balance sheets that support consistent dividends is one answer.
In the upcoming webcast, Navigating Current Markets and Dividend Investment Strategies, Meggan Friedman, Senior Investment Sales Strategist, Northern Trust Asset Management, will offer insights on how to identify quality dividends.
For example, dividend ETF investors who are seeking stability, along with exposure to the growing U.S. markets, can look to the FlexShares Quality Dividend Index Fund (NYSEArca: QDF), FlexShares Quality Dividend Dynamic Index Fund (NYSEArca: QDYN) and the FlexShares Quality Dividend Defensive Index Fund (NYSEArca: QDEF). The suite includes a group of smart-beta ETFs that focus on both quality and dividends.
There are flaws in dividend-focused strategies. For instance, reacting to a reduced dividend after the fact results in holding the dividend-paying security until the next rebalance or potentially after the stock price has reacted to the news. To evaluate consistent dividend payers, a long history is required, which means newer players are excluded from consideration. Short-term changes in the macro-environment could affect a company’s ability to maintain or grow dividends.
Alternatively, FlexShares argued that focusing on the core financial health of a dividend-paying company may be a better approach to address some of the shortcomings of other dividend-themed strategies.
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.
Specifically, the smart beta index targets management efficiency or a 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.
A 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.
By evaluating these different quality facets, FlexShares is better able to determine the likelihood that a company can issue sustainable dividend payouts.
Financial advisors who are interested in learning more about dividend strategies can register for the Thursday, June 25 webcast here.