Interest Rates vs. Dividends

Do any of you BSD’s have any literature on the effect of interest rate changes on dividend rates? It seems like there would be some correlation, both due to changes in the value of cash payout now vs. reinvestment and investor demand for yield. Thanks in advance.

by default, I wouldn’t think there would be any real correlation. Mgmt doesn’t think of their div rate in terms of the current interest rate envronment

No literature, but my kneejerk reaction would be negative. When rates go up, debt financing becomes more expensive. Management would rather retain the earnings versus pay them out. So long as there is a ROIC, I don’t think the investor sentiment would change.

When interest rates rise it is likely that dividend yields will also rise. In other words, high dividend paying stocks (“bond surrogates”) will likely sell off barring external industry specific factors, especially considering the run they’ve had. So, payout ratios stay the same but dividend rates go up and stock prices decline.

To sum up for Ohai so far, we have 3 insightful responses predicting zero, negative and positive correlation. I hope this helps.

From what I’ve seen recently, as rates come down, investors chase yield by selling out of fixed income and buying into stocks, pushing share prices up and thus bringing div yield down. So, positive correlation.

As rates rise, discount rates rise, so prices go down, which means DY has to go up.

ah not bad. mechanically, this works. but people generally don’t adjust the wacc to this level of frequency

It depends why rates go up…whether it’s higher inflationary expectations in a low growth environment or because the economy is booming.

From Jan 62 to current, the 10Yr Treasury and S&P Dividend yield have a R^2 of 56%. I just pulled the FRED data on rates and S&P div yields from the internet.