There were certainly some rough times for dividend stocks in the first half of 2020, but it could have been far worse. Moreover, investors were able to use the volatility in payout stocks to identify cream-of-the-crop strategies, such as 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.
When things were rough for dividend payers in the first half of 2020, there was talk S&P 500 payouts could drop as much as 2020. Fortunately, the situation never got that dire and QDF is up almost 3% over the past month. The fund is also within striking distance of its 52-week high.
“But with little more than a month to go in 2020, the total decline for dividends in the benchmark S&P 500 stock index is likely to have amounted to less than 1 percent — 0.67 percent, more precisely,” reports Jeff Sommer for the New York Times. “That’s the estimate of Howard Silverblatt, senior index analyst for S&P Dow Jones Indices, who has been tracking these numbers closely for decades.”
The QDF ETF Strategy Standing Tall
QDF 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, 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. Low interest rates, which should remain in place for several years, add to the case for QDF, which yields 2.89%.
“Corporations have been inundated with a flood of cash. Enormous monetary and fiscal stimulus programs have helped keep big businesses afloat and allowed many of them to maintain their dividend payouts, which are prized by many income-seeking investors,” according to the Times.
Lastly, QDF steers clear of dividend offending sectors and is heavily allocated to dividend growers in the form of technology and healthcare names.
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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.