With interest rates set to remain low for the foreseeable future, investors should look to dividends as an important and increasingly attractive source of stable returns, experts at the Bank of Montreal (TSX:BMO) said on Thursday.

In a panel discussion on dividends on Thursday, Sherry Cooper, chief economist at BMO Financial Group said that returns in the fixed income market will likely continue to disappoint investors.

“Investors in bonds and bills and traditional fixed income products are earning very, very low interest income flow,” Cooper said.

In contrast, she said dividends are serving investors well. She pointed out that the dividend yield on the Toronto Stock Exchange is 2.8%, half a percentage point higher than the 2.3% yield on 10-year government bonds.

“That means that dividends become a very important component of total returns in any portfolio, and even the total returns in a stock portfolio,” Cooper said.

And dividends could become even more attractive. Cooper pointed out that many corporations have record levels of cash on their balance sheets. But because they’re too uncertain about the economic outlook, they’re reluctant to begin hiring and investing in the growth of their business.

“They’re retaining earnings and using that money to increase dividends, to buy back stock, and in some cases, for merger and acquisition activity,” Cooper said. “This is a period right now where dividends will be extraordinarily attractive.”

She encourages all investors to hold a range of blue chip dividend-paying stocks in their portfolios. Specifically, she recommends choosing names that meet several key criteria:

  • companies with five-year dividend growth in excess of 10%;
  • companies with a payout ratio of less than 60%; and
  • companies with a relatively low beta as a measure of risk.

Paul Taylor, chief investment office at BMO Nesbitt Burns, said investors need not go far to find these kinds of high quality dividend-paying stocks, as there are plenty here in Canada.

Specifically, he urges investors to look at stocks in the health care, telecommunications, utilities and consumer staples sectors.

Stocks he likes include IGM Financial Inc. (TSX:IGM), which has a dividend yield of 4.9%, BCE Inc. (TSX:BCE), which yields about 5.25%, and Finning International Inc. (TSX:FTT), which yields 2.5%.

There are also strong names in the United States, Taylor said. He pointed Pfizer Inc. (NYSE:PFE) and Johnson & Johnson (NYSE:JNJ) as examples.

However, Cooper pointed out that dividends are lower on average south of the border, with many companies having reduced or eliminated their dividends during the financial crisis. The S&P 500 boasts a dividend yield of 2.1%.