Dividend yield is a source of allure for many investors, particularly at a time of record-low bond yields, but dividend growth remains integral to income investors’ long-term outcomes. The FlexShares Quality Dividend Index Fund (NYSEArca: QDF) is one ETF that can enhance those outcomes.
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 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.
“Changes in dividend payments don’t occur in a vacuum. Stocks with rising dividends are often backed by financially stable companies with strong sales and profit growth that support those higher cash distributions,” said Morningstar in a recent note. “These profitable companies often trade at higher prices relative to their fundamentals, including dividends, and rarely, if ever, land in the higher-yielding segment of the market.”
Quality QDF Benefits
Global uncertainty, mainly due to the ongoing COVID-19 outbreak and its effects on the world economy, has pushed more investors into safe-haven government bonds and sent yields reeling.
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 market swoon, indicating that the quality factor can provide some protection during times of elevated market stress.
“Dividend payers with falling prices are more likely to find their way into high-yield portfolios. But it’s important to realize that share prices often fall for a reason–typically when a company’s outlook becomes less rosy,” notes Morningstar. “Poor prospects and depressed prices are what cause dividend-income funds to move further to the value side of the Morningstar Style Box and translate into two big sources of risk. First, the prices of high-yielding companies may fall further in the short run. Second, companies with poor prospects may cut their dividends to preserve cash.”
QDF has 132 holdings, about half of which hail from the technology, healthcare and financial services sectors.
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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.