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FlexShares’ Huemmer comments on dividends in the new financial world

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Investors need to reconsider their approach to dividends in this new investment climate, says Chris Huemmer, Senior Investment Strategist at USD16 billion FlexShares Exchange Traded Funds.

Investors need to reconsider their approach to dividends in this new investment climate, says Chris Huemmer, Senior Investment Strategist at USD16 billion FlexShares Exchange Traded Funds.

As high-profile companies like Shell and General Motors announce dividend cuts and suspensions, it points to a greater trend of uncertainty in the market, he says, as this year alone, more companies have suspended or cancelled their dividends than in the past 10 years combined.

“It is important for investors to consider both the short and long-term view of the dividend space right now,” Huemmer says, commenting that dividend policies are now facing both macro-economic and regulatory pressures.

“With interest rates so low there will be a demand for investors who need income and need to look further than fixed income to meet their income goals, so it’s important to focus on the dividend space today and the quality of dividends.”

The macro economic environment has seen economies being effectively shut down around the world and this has had a particular impact on companies that have a lack of cash flow or whose operations are being hindered by the pandemic.

Regulatory pressure has been brought to bear on certain companies to cut or postpone their dividends, particularly banks or those in the financial sector.

“They have been asked to use their capital to provide liquidity to other businesses,” Huemmer says.

“Our belief, and empirically what we have seen, is a need to focus on the financial health of the company against the current backdrop, looking for strong cash flow and prudent deployment of capital. These tend to provide that buffer that the companies need.”

Finding this in ETFs means heading towards ETFs with the quality factor overlay, Huemmer says. “Those are the types of metrics that follow cash flow, profitability and prudency in capital expenditures. We believe looking at this on a sector by sector basis is key to having a diversified dividend stream.”

Before the pandemic, some two-thirds of dividends were in the energy, financial, consumer discretionary and industrial sectors and those have all been sensitive to the financial environment, Huemmer says.

“You are finding them now in the same places, but dividends are also found across the board – in health care or technology which traditionally may not have been areas to go and find dividends.

“If you look across all sectors, you can find attractive dividend payers in all sectors.”

Times have changed in valuing companies as well, Huemmer says. Financial statement information is still key in valuing companies but now the focus should be on profitability because the more profitable a company is, it’s better protected in times of financial stress.

“Look at cash flows and cash flow levels,” Huemmer urges. “In between financial crises, cash flow is often overlooked but it’s included in our scoring because in periods like this – extra cash flow gives you extra benefit.”

FlexShares ETFs offers a suite of products focusing on quality and yield within a sector neutral framework. “One of our big tenets is ‘don’t take large sector bets’ for risk management.”

The firm offers three US dividend products and three international with different beta exposure within the products, either lower beta, beta similar to the market or greater than the market beta exposure, designed to give investors the opportunity of adjusting their beta exposure in markets like this.

“In addition to financial health, investors need to be aware of the way they evaluate dividend securities. A lot of people focus on dividend history, and in this environment, the names we have seen cut dividends are not firms that have done it before,” Huemmer says. “When you are looking at a company that has consistently paid a dividend, be aware that past financial performance does not mean future dividend success. It could skew your portfolio to exclude contemporary dividend payers.” 

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