In today’s low rate environment, investors searching for decent returns should consider putting money in dividend paying stocks, finds a new report from CIBC World Markets Inc.

“The spread between TSX dividend yields and those on corporate bonds is now near the tightest in decades,” says CIBC’s Chief Economist Avery Shenfeld in the bank’s latest Economic Insights report. “In that sense, investors don’t give up much for going into stocks rather than bonds” and can benefit from increases in dividends per share down the road.

“Reinvested dividends account for a sizeable share of the longer term return from holding stocks, and stable dividend payers tend to offer more downside protection in uncertain times,” says Shenfeld.

The report cites a range of factors that make dividend-paying equities particularly attractive in today’s economic climate.

First is the low interest rate environment that Shenfeld says is “likely to hang around longer than the market now expects.” This is resulting in an “an exodus of investor dollars” to dividend paying equities from short-term risk free investments that essentially offer no return.

Another consideration is that reliable dividend payers have tended to outperform the broad market and have been less volatile in precarious times.

“S&P has defined a basket of ‘dividend aristocrats’ — a changing group of TSX-listed companies that have consistently increased dividends per share in the prior five years. That group has outpaced the market not only in the last half-decade, but also in year-to-date returns during a volatile 2009,” says Shenfeld.

A third factor is the reduced risk of “dividend trap” — investing in companies that offer a generous yield today, but may not be able to pay such high dividends or indeed any dividends in the future.

Shenfeld notes that the number of firms paring or eliminating dividends has fallen sharply from early 2009’s peak, reflecting that corporate Canada has emerged from the recession with a lighter debt load than it had at similar points in prior cycles. “That leaves companies under considerably less pressure to cut dividends further for debt repayment purposes.”

Some TSX firms have actually increased dividends in the last year, notes Shenfeld. “The list not surprisingly includes firms in highly capital intensive sectors like telecoms/utilities, which benefit from lower rates and provide vital or nearly indispensable services.” It also includes some consumer staples providers and companies involved in resource transportation and shipping, levered to Asian growth.

Shenfeld says that dividend seekers have typically looked to telecoms and utilities for healthy dividend yields, and “those two sectors indeed top the pack in terms of TSX payout ratios.” He also notes there are six other groups with dividend payouts that are more than four per cent of the share price. These include real estate, media, banks and healthcare.

Elsewhere in the report, Canadian REITs are flagged as attractive yield plays with valuations looking “unduly tarnished by analogies to U.S. real estate conditions.”

IE