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The Search for Yield - Dividends & Payout Ratios

In an era of historically low bond yields and zero percent benchmark interest rates,
the thirst for income has rarely been so hard to quench. Since 2009, the yield on 3-
month Treasury Bills has averaged 0.65% in Canada and 0.10% in the United
States. From 1954 to 2007, U.S. 3-month yields averaged 5.2%. Investors have
been fleeing pure equity investment vehicles for years and flocking to income
products/bond mutual funds in search of income and lower volatility. The latter is
likely to prove elusive in coming years as monetary policy normalizes higher. The
traditional high dividend paying sectors such as Utilities, Telecom, and REITs have
benefitted the most from income oriented flows in recent years, but other areas of
the market may now attract some attention. U.S. Banks that have cleared stresstests
will start raising dividends and Technology behemoth Apple announced
yesterday that it would re-introduce a dividend. The S&P 500 dividend currently
stands at US$27.53 and its dividend yield of 1.95% had until recently surpassed the
U.S. 10-Yr bond (2.38% yesterday, 1.88% last 3M average). In Canada, the TSX's
dividend yield (2.85%) still edges 10-Yr Canada bonds (2.29%). Both for the TSX
and S&P 500, a positive dividend yield-to-bond yield spread is a first since late
2008-early 2009. Dividend growth has lagged the profit recovery since 2009 and
the S&P 500's payout ratio of 28% is the lowest since 1871. Equity flows could see
a positive reversal if bond returns start to disappoint. Should this happen, we
believe companies offering high yields and the ability to raise dividends will benefit.
Non-traditional dividend areas are likely to join the dividend party as well. Our Chart
of the Day highlights the S&P 500 and TSX index/sector dividend yield and payout.