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By Adam McCullough, CFA | 05-24-2017 11:00 AM

A Solid Fund for Investors Seeking Dividend Yield

Bronze-rated FlexShares Quality Dividend is off to a strong start, but we'd like to see how it performs during a market downturn.

Adam McCullough: Bronze-rated FlexShares Quality Dividend is a solid fund for investors seeking dividend yield. Investors can benefit from owning dividend-paying stocks, but chasing yield can be dangerous. For example, the highest-yielding stocks may be under financial distress and more likely to cut their dividends than their lower-yielding counterparts. Many of these stocks pay out a large share of their earnings as dividends, leaving a small a buffer to cushion these payments if their business deteriorates. 

This fund strives to sidestep this risk by balancing profitability and yield. If a stock is more profitable, it should be able to maintain its dividend during a market downtown or raise its payout ratio in the future. Although this fund's profitability tilt helps it avoid the riskier, highest-yielding stocks, its yield has consistently topped the category average by 30%.

Drawbacks to this fund include its opaque process and short live track record. Because this fund uses a proprietary quality scoring system and optimizes its holdings with narrow constraints, it's difficult to determine how the fund's holdings will shake out at each quarterly reconstitution. The fund has performed well since its inception in December 2012, but we'd like to see how it performs during a market downturn. Encouragingly, the fund avoided holding ConocoPhillips in early 2016 when it cut its dividend. 

The fund is off to a strong start and it balances high yield with risk management well. And at 37 basis point fee is low compared to actively managed peers.

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