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Don't Forget About This Dividend ETF

March 6, 2019 11:57 am
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A new entrant to the fray of dividend exchange traded funds is the Global X S&P 500 Quality Dividend ETF (CBOE: QDIV), which debuted last July.

While QDIV lacks the seasoning of some rival dividend ETFs, the fund's relevance in today's market environment is noteworthy. 

What Happened

QDIV follows the S&P 500 Quality High Dividend Index, a benchmark that holds stocks that rank in the top 200 of the S&P 500 in terms of quality scores and dividend yields. The quality overlay is important with yield-driven strategies, as some high-yield dividend stocks belong to companies that are on the cusp of negative dividend actions, including cuts or suspensions.

Definitions of the quality factor vary, but one of its hallmarks is that companies with the quality designation are usually financially sound and have the capability to pay and grow dividends. QDIV was home to 71 stocks at the end of last year.

Why It's Important

“While there are a handful of definitions for quality, S&P defines it as a combination of a company’s return on equity (profitability), debt to book value (financial leverage), and its change in net operating assets (accruals ratio),” Global X said in a recent note.

QDIV can provide some clues regarding sectors with stocks that fit the bill as quality names. At the end of last year, the fund allocated more than 35 percent of its combined weight to the consumer discretionary and technology sectors. Those sectors have been two of the biggest drivers of S&P 500 dividend growth since the financial crisis.

“Given that quality metrics help illustrate a firm’s potential profitability and financial stability, they also are insightful into the likelihood of a firm maintaining its dividends — that is, higher quality firms are more likely than low quality firms to maintain or grow their dividend,” Global X said. 

“This is an important attribute to income-oriented investors who prefer dividend stability over other characteristics, like high dividends or growing dividends.”

What's Next

The quality factor also proved to be less volatile than traditional equity strategies when stocks swooned late last year. Additionally, QDIV members have higher return on equity and lower financial leverage than the broader S&P 500.

QDIV, which pays a monthly dividend, is up 15.5 percent this year.

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