Quality Check: Analyzing QDF's Dividend Strategy

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Investment Thesis

Today's article initiates sum of nan FlexShares Quality Dividend Index Fund (NYSEARCA:QDF). QDF seeks to supply a diversified portfolio of high-quality dividend-paying U.S. securities based connected guidance efficiency, profitability, and rate flow. Over nan past 10 years, QDF has gained approximately 175%, underperforming peers for illustration nan WisdomTree U.S. LargeCap Dividend ETF (DLN). Based connected this way grounds and my information of its existent fundamentals, it's not a compelling opportunity, and I urge investors see nan different dividend ETF choices provided below.

QDF Overview

Strategy Discussion

FlexShares tracks nan Northern Trust Quality Dividend Index, selecting from nan Northern Trust 1250 Index, representing large- and mid-cap U.S. companies. After screening retired non-dividend-paying stocks, each institution is assigned a Dividend Quality Score based connected guidance efficiency, profitability, and rate flow.

QDF Dividend Quality Score Methodology


The methodology evaluates companies comparative to their assemblage peers, ensuring an "apples-to-apples" comparison pinch nary assemblage bias. After eliminating nan bottommost quintile successful each assemblage based connected Dividend Quality Scores, nan Index diversifies to limit vulnerability to individual securities, industries, and sectors. The Index is besides optimized based connected nan pursuing constraints:

Northern Trust Quality Dividend Indexes Methodology

Northern Trust

The Index intends for a "market-like" beta. Using nan Russell 1000 arsenic a benchmark, that intends a five-year beta of astir 1.02. That's different since large-cap dividend stocks are known for their risk-reducing features. However, FlexShares takes a sustainable yield, full returns attack alternatively of a yield-focused one. As noted, nan target is simply a dividend output supra nan genitor Index, easy achieved aft nan first surface excluding non-dividend-payers.

QDF's disbursal ratio is 0.37%, which includes a 0.01% interest reimbursement effective until astatine slightest March 1, 2023. The pursuing are immoderate further money statistic listed connected QDF's money page. Highlights see 135 holdings, including rate and equivalents, a weighted-average $399 cardinal marketplace capitalization, and a 2.32% trailing dividend yield. The 2.78% distribution output listed is forward-looking and assumes nan astir caller quarterly costs will continue. The 2.32% fig is much applicable and supported by my study of QDF's existent holdings.

QDF Fund Facts


Performance Analysis

As of January 31, 2023, QDF gained an annualized 11.31% since its December 14, 2012, motorboat date. By comparison, nan Russell 1000 Index gained 13.04%, 1.73% per twelvemonth lower. Investors tin way this benchmark Index pinch IWB and VONE, 2 costs pinch little disbursal ratios.

QDF vs. Russell 1000 Index Performance


Dividend ETFs outperformed benchmarks for illustration nan Russell 1000 Index complete nan past year. The pursuing array summarizes humanities returns for 28 dividend ETFs, including QDF and VONE. All ETFs person a minimum $100 cardinal weight-average marketplace capitalization.

QDF vs. Large-Cap Dividend ETF Peers

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In this sample, 20 ETFs outperformed QDF complete nan past year. QDF's 36.26% summation successful nan erstwhile 5 years classed #24/25, and its ten-year 175.78% return classed #8/12. These results propose nan strategy isn't optimal.

I've witnessed this earlier pinch different quality-focused funds. Screening for value is important, but not important and useful champion erstwhile applied to small-cap securities. Remember that astir large-cap stocks are highly-profitable. Using Seeking Alpha Profitability Grades adjusted connected a ten-point scale, scores scope from 9.22/10 to 9.81/10 for nan sample above. QDF's is 9.39/10, truthful it's mean astatine best. It's thing different costs execute by simply utilizing dividend consistency arsenic nan superior screen.

Another imaginable logic is QDF's "market-like" beta feature. As mentioned, this isn't needfully a affirmative feature. Dividend ETFs often person little volatility and lesser drawdowns. However, QDF's figures person been worse than VIG, DLN, and SCHD since its inception.

QDF vs. VIG vs. DLN vs. SCHD Performance

Portfolio Visualizer

Finally, QDF's assemblage constraints whitethorn show a misconception astir what investors want from nan ETF. Investors desiring market-like vulnerability will first move to low-cost costs for illustration VONE. To fulfill different finance objectives, for illustration earning a sustainable dividend yield, they'll see dividend ETFs materially different from VONE. That's not nan lawsuit here, arsenic nan Index optimization limits progressive assemblage vulnerability to 6%. As a result, nan money is structurally similar, pinch a comparatively precocious 0.37% disbursal ratio.

QDF Analysis

Sector Exposures and Top Ten Holdings

The pursuing array highlights QDF's assemblage exposures alongside VONE, VIG, DLN, and SCHD. DLN is simply a adjacent close because its Index besides calculates composite scores for dividend-paying securities. The captious quality is that it's amended balanced crossed sectors. QDF's 30.01% vulnerability to Technology stocks is important but drives down nan portfolio's dividend yield.

VONE vs. VIG vs. DLN vs. SCHD vs. QDF Sector Exposures


Apple (AAPL) and Microsoft (MSFT) lend 12.5% of this Technology vulnerability and output 0.60% and 1.05%, respectively. Others salary person to 3%, including Broadcom (AVGO), Cisco Systems (CSCO), and Comcast (CMCSA). The pursuing apical 10 holdings full 32.43%.

QDF Top Ten Holdings


Fundamental Analysis By Industry

The pursuing array highlights selected basal metrics for QDF's apical 25 industries, totaling 71.76% of nan portfolio. That's fantabulous diversification for a money pinch 131 holdings. VIG and DLN person astir 300, yet person little manufacture diversification.

QDF vs. VIG vs. DLN vs. SCHD Fundamentals

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1. The Technology Hardware, Storage & Peripherals manufacture drives up nan portfolio's volatility, suggesting that Apple's precocious weighting was applied chiefly to execute nan marketplace beta objective. Besides precocious profitability, nan manufacture has fewer redeeming features for dividend investors. Components waste and acquisition astatine a precocious 26.96x guardant earnings, person a 0.85% guardant dividend output and person single-digit income and net maturation rates. Notice really VIG, DLN, and SCHD person five-year betas astir 0.90. This fig is astir mean for nan class and is 1 of nan cardinal draws.

2. As discussed, QDF's 9.39/10 profitability people isn't unique. DLN's is nan same, and VIG and SCHD are close. Notice nan relationship betwixt size and profitability scores successful nan table. Generally, thing complete $100 cardinal earns a precocious score.

3. QDF's estimated income and net maturation rates are astir 5%, which is debased based connected these 3 comparators. High Technology vulnerability helps, but little than you'd think. QDF's 18 holdings successful this assemblage person an 8.79% net maturation rate, marginally amended than VIG and DLN.

4. QDF trades astatine 19.65x guardant earnings, not capable discount to warrant nan debased maturation rates. I precocious expressed optimism astir VIG based connected its comparatively higher maturation rates and coagulated net momentum, expressed done its 5.83/10 EPS Revision Grade. QDF doesn't guidelines retired successful this regard.

5. QDF's gross dividend output is 2.68% aliases 2.31% aft fees. DLN's expected nett dividend output is 2.44%, and SCHD's is 3.44%. There are besides galore different high-dividend ETFs to take from, which I listed earlier successful nan capacity study section. Furthermore, fixed nan weaker income and net maturation rates, its constituents' 10.21% five-year dividend maturation complaint is unsustainable. It's not unsocial to QDF, but it's thing to retrieve if making dividend income projections. Higher-yielding ETFs for illustration SCHD springiness you an separator that could salary disconnected 5 aliases 10 years later.

Investment Recommendation

QDF's capacity history is agelong capable to propose its strategy has flaws. Its value screens whitethorn beryllium unnecessary for large-cap stocks, and its assemblage constraints and market-like beta mean QDF is excessively akin to simple, low-cost ETFs for illustration those search nan Russell 1000 Index. We've witnessed this recently, arsenic QDF was 1 of nan worst performers successful its adjacent group complete nan past year.

QDF's expected 2.31% dividend output is easy to find, and mediocre income and net maturation prospects propose early dividend maturation will beryllium limited. I don't spot galore reasons to bargain this comparatively costly ETF, and I judge astir will find VIG, DLN, and SCHD arsenic amended alternatives. Thank you for reading, and I look guardant to nan chat below.

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