The recently launched S&P 500^® Quality FCF High Dividend Index measures high-dividend stocks supported by strong free cash flow (FCF), offering an approach that blends income generation and financial resilience. Companies that consistently generate excess cash may be better equipped to sustain and grow dividends, even during periods of market stress. This focus on income and FCF strength offers a framework for identifying healthier, more dependable companies with higher yields. In this blog, we will explore the index’s methodology, performance characteristics, dividend yield and positioning.

Methodology Overview

The index first excludes any company that has not maintained dividend payments for at least five consecutive years. Remaining constituents are then ranked by their FCF score, a composite of FCF margin and FCF return on invested capital (ROIC). These metrics reflect how efficiently revenue is converted into FCF (FCF margin) and how effectively capital is deployed to generate that cash (FCF ROIC). The top 50% of companies within each sector are selected to help ensure broad sector representation. From this subset, the 100 companies with the highest dividend yield are chosen and weighted according to their dividend yield. Exhibit 1 shows a snapshot of the index methodology.

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Performance Comparison

Exhibit 2 illustrates that since April 2001, the S&P 500 Quality FCF High Dividend Index has outperformed the S&P 500 on both an absolute and risk-adjusted basis. On an absolute basis, it has delivered an annualized return of 10.35%, compared to 9.22% for the S&P 500. The index has also maintained comparable upside participation while offering stronger downside protection, as reflected in its upside and downside capture ratios of 95.9 and 85.7, respectively.

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Dividend Yield Comparison

Exhibit 3 illustrates that, as of Oct. 31, 2025, the S&P 500 Quality FCF High Dividend Index had a yield of 3.59%—more than three times the S&P 500’s current yield of 1.15%. Exhibit 4 further highlights that the resulting 2.44% yield spread sits in the 97^th percentile since 2002, surpassed only during major market declines in February 2009, March 2020 and briefly in June 2024.

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Defensive Characteristics

Exhibit 5 ranks the S&P 500’s historical monthly returns, groups them into quintiles from highest to lowest and then calculates the S&P 500 Quality FCF High Dividend Index’s average excess return within each quintile. This analysis highlights the index’s defensiveness: in the bottom quintile—when the S&P 500 delivered its weakest monthly returns—the index outperformed by an average of 0.8%.

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Sector Comparison

Exhibit 6 shows that combining FCF-based quality metrics with high dividend yield has produced a broadly balanced sector profile on average, with 8 of the 11 GICS sectors staying within ±5% of the S&P 500 over the full period. The index currently exhibits meaningful overweights in Consumer Staples, Energy and Financials, and a notable underweight in Information Technology. This tech underweight likely reflects elevated sector valuations, which tend to suppress dividend yields and reduce representation in yield-focused strategies.

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Conclusion

The S&P 500 Quality FCF High Dividend Index stands out as a distinctive dividend strategy, thanks to its methodology that combines FCF-based quality metrics with a focus on dividend consistency and high yield. Its historically wide yield spread relative to the S&P 500 is particularly relevant given the current market environment of anticipated rate cuts.¹ Over the long term, the index has outperformed the S&P 500, exhibited defensive qualities and maintained a more balanced sector profile than a typical dividend strategy.

¹ https://www.atlantafed.org/cenfis/market-probability-tracker

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