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A recent report from Fidelity Investments shows that multiples expand for dividend paying stocks with high payout ratios when nominal interest rates are at extremely low levels as rates are today.

From The Blog of HORAN Capital Advisors
From The Blog of HORAN Capital Advisors

Essentially, the report indicates investors view high dividend payout equities as bond substitutes. The report states:

In a market with extraordinarily low nominal yields, the relationship supporting the
risk premium between equity and fixed income is challenged, and stable high quality dividends can be viewed similarly to a bond coupon. Thus it would be logical for the market to value dividends within the prevailing yield structure of the fixed income market:

Price/Dividend = f (Interest Rates)

Undistributed earnings are still subject to economic uncertainties with investors expressing concern about a company's ability to effectively allocate capital. Consequently, we see a higher equity risk premium in the non dividend payers at low nominal rates.

From The Blog of HORAN Capital Advisors
From The Blog of HORAN Capital Advisors

The Fidelity report details the performance of dividend payers in the Nikkei Index during the 2002-2012 time period. For Japan this period has been characterized by persistent deflationary pressures and the higher dividend payers have outperformed with lower volatility.

Investors need to keep in mind these higher yielding stocks are still equities. As such, equities are subject to the vagaries of the movements in the stock market.