Under The Hood: Beta And Dividends Collide

It is often said that one of the primary advantages of dividend stocks is that many members of this asset class have lower betas than their non-dividend paying counterparts. Of course, since beta is a measure of stock's volatility relative to the broader market, it stands to reason that low-beta stocks can be laggards during times of voracious market rallies.

To that end, some investors may opt to hunt for dividend payers with a bit more excitement. Those stocks are not impossible to find. There are 41 S&P 500 constituents with dividend yields above three percent and betas of one or higher, according to Finviz data.

On the other hand, investors can eschew the stock-picking gambit and let a new ETF do some of the dividend/beta legwork for them. The FlexShares Quality Dividend Dynamic Index Fund (NYSE:QDYN) is that fund.

QDYN is one member of a trio of new dividend ETFs introduced by Northern Trust's (NASDAQ:NTRS) FlexShares unit last week. The new ETF is designed to be a broad market fund that delivers income while targeting a beta that is above its underlying index, that being the Northern Trust 1250 Index. The targeted beta of QDYN will usually be between 1 and 1.5 times that of the index, according to FlexShares.

QDYN's current weighted average beta is 1.22, according to FlexShares data. However, it is worth noting that the ETF's potential to outperform lower beta stocks and its own index does not mean a large allocation to higher risk small-caps. In fact, QDYN only features large-caps and mid-caps among its lineup and the weighted average market value of the ETF's 194 holdings is over $74.5 billion.

At the sector level, QDYN is fairly diverse as five industry groups financials, technology, consumer discretionary, industrials and energy receive double-digit allocations. Financials and technology combine for over 35 percent of the fund's weight.

Noteworthy is the fact that QDYN's emphasis on having a beta in excess of its index does not translate to completely eschewing those sectors that are famous for having low betas. Consumer staples, telecommunications and utilities names combine for about 19 percent of the new ETF's weight.

QDYN is also diverse when it comes to the weights assigned to its individual holdings. The fund's top-10 lineup combines for approximately 26 percent of its overall weight, meaning investor are not overly exposed to the whims of just a few stocks in this ETF. Those top-10 holdings include seven Dow components with the three outliers being Wells Fargo (NYSE:WFC), Altria (NYSE:MO) and Accenture (NYSE:ACN).

QDYN, which has a net annual expense ratio of 0.37 percent, is so new that yield data is not yet available, but that does not mean that the ETF is not worthy of consideration by income investors in 2013. Indeed, QDYN enters an arena loaded with competition. Not only are there plenty of established dividend funds on the market, but ETF issuers have not been shy about introducing new dividend ETFs in 2012.

That means each new entrant to the dividend ETF competition must do something unique in order to stand out or risk being passed over in favor of a more established rival. QDYN's emphasis on beta, while not excessive, and stocks with robust dividend track records could prove to be a compelling combination, particularly in a low interest rate environment.

For more on ETFs, click here.