Dividends have long been an important part of total return, serving as a stable base during times of market volatility, and satisfying investor demand for yield during periods of low interest rates. Yet blindly chasing high dividends has led many investors astray. A seemingly generous dividend can mask a company’s financial weaknesses.
Evaluation of dividend quality
FlexShares’ suite of Quality Dividend ETFs take a different approach. By using a multifaceted evaluation of dividend quality, FlexShares attempts to evaluate how well-positioned a company is to continue dividend payments under current or possibly varying market/economic conditions.
Instead of focusing solely on a company’s dividend history, the FlexShares team examines companies across three lenses:
- Management Efficiency: How aggressive is management in the deployment of capital and their financing decisions?
- Profitability: How much of a competitive advantage does the company have?
- Cash Flow: Is the company able to fulfill its debt obligations and meet day-to-day liquidity needs?
By utilizing this process across a suite of six funds with varying risk targets, the FlexShares Quality Dividend process can meet a variety of portfolio diversification needs.
FlexShares has recently produced a paper explaining the process in more detail.