66 Pages Posted: 24 Oct 2015 Last revised: 5 Aug 2017
Date Written: July 2017
We show that stocks with higher dividends tend to have longer duration, experiencing greater price increases when interest rates decline. Evaluating candidate explanations, we find evidence supporting a hypothesis of investors "reaching for dividends." Specifically, when interest rates fall, households increase their asset allocations from bonds to stocks; flows into income-oriented equity funds also increase, with higher dividend-yielding funds attracting more in flows. Responding to their incentives, income fund managers more aggressively over-weight high dividend stocks in a low-rate environment. The resulting higher demand appears to impact stock prices and returns: Lower interest rates forecast lower excess returns on high dividend stocks.
Keywords: Equity Duration, Interest Rate Risk, Dividends, Income Funds, Flows, Institutional Investors
JEL Classification: G10, G11, G12, G23
Suggested Citation: Suggested Citation
By Andrew Lo
By Meb Faber