In a trying environment for dividend investors, quality and dividend growth are points of emphasis, but there’s a place for the right kind of yield at a time when many fixed-income instruments sport low yields. The FlexShares Quality Dividend Index Fund (NYSEArca: QDF) allows investors to embrace all of those concepts.
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.
QDF, which yields 3.15%, is up 15% over the past month, but dividend investors play the long game. Fortunately, the FlexShares fund has strong long-term potential and recently caught an upgrade to Silver from Bronze from Morningstar.
“Its quality orientation should help it weather downturns better than its large-value Morningstar Category peers. In combination with its cost advantage relative to its category competition, this defensive tilt should help it outperform the Russell 1000 Value Index over the long term,” said Morningstar analyst Venkata Sai Uppaluri in a recent note. “Under our new ratings framework, which places a greater focus on fees and benchmark-relative performance, we are upgrading the exchange-traded fund’s Morningstar Analyst Rating to Silver from Bronze.”
QDF Has Plenty of Quality
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.
QDF’s quality focus is important. 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 fourth quarter of last year’s market swoon, indicating that the quality factor can provide some protection during times of elevated market stress.
“The firm’s quality scoring model has helped the fund exit positions with deteriorating fundamentals that may be at risk of slashing their dividends. As an example, it dropped ConocoPhillips (COP) from its portfolio before the firm cut its dividend in early 2016,” said Uppaluri.
This year, none of QDF’s top 10 holdings have been dividend offenders and the energy and real estate sectors – two problem areas for dividend investors in 2020 – combine for just 9% of the fund’s roster.
“The fund’s dual focus on yield and quality means it won’t rank among the highest-yielding funds in the category. That said, its average annual yield since inception was 20% greater than the Russell 1000 Value Index,” according to Morningstar.
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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.