With signs emerging that some dividend stocks are getting their grooves, a quality approach to dividend payers is all the more meaningful. Enter 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.

The first half of 2020 was hard on dividend investors as a slew of companies from the consumer discretionary, energy and real estate sectors, among others, slashed or suspended payouts, reminding investors quality matters when it comes to dividends. Fortunately, QDF focuses on some quality basics that should help long-term investors.

“We want our long-term dividend growth ideas to have strong competitively advantaged business models, solid secular growth trends or recession-resistant characteristics,” according to Seeking Alpha.

Right Time for QDF

In any environment, a fund’s sector exposures matter. With the $1.37 billion QDF, is light on this year’s dividend offending sectors as consumer discretionary, energy and real estate combine for just 17% of the fund’s weight, according to issuer data.

Conversely, technology and healthcare stocks combine for 43.50% of QDF’s roster and those have been steady dividend growth destinations this year. QDF’s more than 30% allocation to technology is one of the highest to that sector among all dividend ETFs.

“We also like dividend payers with impressive balance sheets (sometimes and preferably with hefty net cash positions) and growing future expected free cash flows (strong Dividend Cushion ratios),” notes Seeking Alpha.

Those traits are available in QDF.

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 and are 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.

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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.