The Case For Dividend Quality

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.

dividend quality

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.