Unexpectedly equity markets on both sides of the border broke out in September, rx with the S&P 500 and TSX Composite posting their best performance for the month in 71 and 14 years, here respectively. A lot of this is due too many investors were betting on another crash and QE2 rumors from the US Federal Reserve.

Yield is still very much the name of the game though, and it will take more than one good month to reverse investors’ recent preference for “clipping the coupon” or “Investing for income”. Moreover, recent months have seen more investors recognize that safe havens like Treasuries are not as attractive as dividend stocks, when account is taken of today’s depressed yields. Underscoring the shift, investor inflows into dividend and income funds have risen at twice the percentage pace as inflows into equity funds in general, and bond funds this year.

Those betting that dividend stocks will provide a needed portfolio anchor in that sort of environment have history on their side. On both sides of the border, dividend-paying issues have fared better over the medium term than those with low or zero payouts.

The gap has been the widest in a period of weak economic performance. Since 1990,  quality US dividend stocks have outpaced the S&P 500 by over 9%, annually, on average in years when GDP grew at a sub-2% pace, compared to a modest 2% deficit when growth surpassed that pace. The same general story applies in Canada. Canadian dividend stocks have outperformed in the TSX Composite by about 5%-pts in recent years when the economy grew at a sub-2% pace, and have still outperformed when growth topped that pace, albeit by a slimmer 1% margin.Although the TSX has yet to regain its pre-Lehman bankruptcy levels, an investor in quality dividend issues back then would be up by well over 10% today, counting distributions.

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