The Sweet Spot For Dividend Stocks

It’s becoming increasingly difficult to invest in the current environment. Over the last few weeks some of the legends of the investment business have said this market is too difficult and have subsequently shut down their businesses. It’s no wonder that we’ve seen an increasing demand for bonds and bond related instruments. But that doesn’t mean equities are dead. In fact, Morgan Stanley believes this is a perfect environment for high quality dividend paying stocks. MS believes there is an opportunity here.

An outlook for weak long-term earnings growth that leaves a reduced possibility of P/E expansion, meaning that dividends have to be a dominant part of total returns. Historically a dividend yield of 2% would equate to a P/E multiple of nearly 17x (or alternatively a dividend yield near 3% supports the current market P/E of 14.5x). We do not think a 3% dividend yield is unrealistic. It would require the payout ratio to rise into the low 40% range – a move that would put it back close to the long-term average.

Source: Business Insider

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