As interest rates trend lower, dividend-paying equities are emerging as a compelling alternative to traditional fixed-income products. With yields on GICs and high-interest savings accounts declining, the relative attractiveness of dividend stocks is on the rise, both in terms of income potential and total return.

Over the past few years, rising rates drove more than $200 billion into short-term deposits, diverting capital from high-yielding equities. However, as those deposits mature, investors are seeking new opportunities, and dividend-paying stocks are a natural destination. Not only do these stocks offer competitive yields, but eligible dividends also enjoy tax advantages through the dividend tax credit, making them a more efficient income source for many Canadian investors.

Analysts anticipate a rotation back into high-dividend sectors as investors look to offset the decline in interest-income securities.

Canadian banks, in particular, have shown resilience, posting strong Q2 earnings despite economic uncertainty. The “Big Six” continue to exceed expectations, aided by lower provisions for credit losses and strong capital positions, most notably, an average CET1 ratio of 13.7%, well above the regulatory threshold (see chart below).

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These fundamentals not only support ongoing dividend payments but, in some cases, have even enabled share buybacks. For long-term investors, the consistency and potential growth of dividends offer reassurance during periods of market volatility. As fixed-income yields compress, the stable and tax-advantaged income from dividend equities becomes even more valuable.

As the interest rate environment shifts, we believe dividend-paying stocks, particularly in the Canadian Financial and Infrastructure sectors, are well positioned to attract renewed investor interest. We maintain our conviction in allocating a percentage of the portfolio to good-quality Canadian companies.

With billions in maturing GICs set to be reinvested, this "yield trade" may gain momentum in the months ahead.