Seeking dividend-paying alternatives doesn’t always have to be a matter of finding the highest yield while taking on higher risk. Fortunately, there are funds like the FlexShares Quality Dividend Dynamic Index Fund (QDYN).
QYDN gives investors an option to find not only strong dividend income, but quality-focused income as well.
“For decades, investors have looked beyond price appreciation to stock dividends as another source of return in their equity portfolios,” a FlexShares Fund Focus article noted. “In recent years, persistently low interest rates have made dividend income even more valuable as investors have sought an income-producing alternative to traditional fixed-income investments.”
“As dividend income becomes more important to investors’ overall portfolios, it’s critical to avoid common risks that can threaten their dividend income stream,” FlexShares added. “It can be tempting to simply choose stocks with the highest dividend yield in an effort to boost a portfolio’s total return and income potential—but those high yields may come with higher risks.”
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.
Avoiding Dividend Traps
One of the risks that FlexShares alluded to was the quandary known as “dividend traps.” Investors might be lured into opting for these high-paying dividend stocks, but at the same time, falling stock prices could be the end result.
“Primarily, investors must avoid so-called ‘dividend traps,'” FlexShares mentioned. “High dividend yields often result from falling stock prices, either due to company-specific financial challenges or to broader market or macroeconomic threats.”
“Those problems may cause companies to reduce or suspend their future dividends, undercutting the expected benefit investors look for from dividend-paying equities,” FlexShares added. “What’s more, dividend-paying stocks may be concentrated in specific sectors and industries, so focusing on them may lead to portfolios that are under-diversified and overweight in those particular areas.”
With its combination of management, profitability, and cash flow, QYDN is able to apply a dividend score and ensure that only quality holdings become a part of the fund.
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