Amid a spate of dividend cuts this year, payout dependability and quality are taking on added significance. Enter the FlexShares Quality Dividend Dynamic Index Fund (NYSEArca: QDYN).
QDYN’s underlying index 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.
“Historically, a successful dividend investing strategy has been about identifying companies that consistently paid dividends and grew dividend pay-outs over the long term,” said FlexShares in a recent note. “Seeking out dividends without considering a company’s future ability to maintain them is akin to buying high yield debt without considering its default likelihood.”
QDYN allocates nearly 31% of its weight to technology stocks, which is well above-average among dividend ETFs, putting the fund in a position to deliver payout growth for investors.
With QDYN, 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. Importantly, QDYN is reliant on backward-looking dividend growth streaks.
“But our concerns about approaches that rely on dividend payment history are amplified in an environment where companies may be reducing or eliminating dividends, even on a temporary basis, as those funds may see their eligible investment universe shrink considerably, and potentially for many years,” according to FlexShares. “Further, strategies that use dividend payment history as a proxy for quality may have to sell positions following a dividend cut. Unfortunately, prior to selling, they had no potential means of predicting a company’s likelihood of actually continuing to pay a dividend – so we believe they are selling after the fact.”
FlexShares’ quality dividend 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 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.
While QDYN focuses on quality, it doesn’t cheat investors when it comes to income as highlighted by a distribution yield of 3.28%. The fund holds 155 stocks.
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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.