It’s going to take some time for S&P 500 dividends to return to pre-pandemic heights, but the FlexShares Quality Dividend Index Fund (QDF ) can help investors deal with a “new normal” for dividends.
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’s emphasis on quality is particularly relevant at a time when there are restraints on payout growth in some sectors.
“For one thing, during times of economic downturns, as we’re in now, companies consider changes to the dividend to keep cash on hand,” reports Bailey McCann for the Wall Street Journal. “At the same time, government loans designed to help companies during the pandemic lockdowns might also set limits on the dividends businesses can pay out in the future.”
The Quintessential QDF
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.
“According to data from Janus Henderson, which tracks dividend stocks through its Global Dividend Index, more than half of the companies in the index canceled their dividends in the second quarter and an additional 25% lowered payouts,” according to the Journal.
A quantitative, multi-factor model methodology that screens for quality and dividend yield may be a better way to target dividend payers efficiently. Specifically, FlexShares focuses on the core financial health of a dividend-paying company to address some of the shortcomings of other dividend-themed strategies, screening for management efficiency, profitability, and cash flow as a means of quality control.
QDF’s focus on a company’s financial health is particularly relevant at a time when many companies took on debt simply to survive in the first half of the year.
“For investors who have exposure to companies that took on debt during the first half of this year, now is the time to look for any signs of weakness and determine whether to stay or sell,” according to the Journal.