Home > Uncategorized > Stock Dividend Yields Go Above Bonds

Stock Dividend Yields Go Above Bonds

September 23, 2011 Leave a comment Go to comments

I recently updated some key indicators I track for the indexes I use. In the process I noticed that with the fall in bond yields and stock prices recently there are places where you can get a major stock index with a dividend yield greater than the yield on bonds. For example the TSX Composite dividend yield appears to be around 2.75% now while the DEX Universe bond index yield to maturity is around 2.4%.

Not only is there a fairly good gap between bond yields and stock earnings, but you could actually get more cash immediately from holding stocks. Combined with the likely price increases following somewhat below-average stock valuations, this makes quite a difference from the start of the year when bond yields were close to 1% higher and stock earnings yields were about 1.5% lower

The main risk remaining is that the drop in stock prices could be predicting a worsening economic environment where stock earnings fall and dividends might get cut. Then again economic indicators have predicted 9 of the last 6 recessions and stocks are for specific companies, not the whole economy. Other than that one risk it looks like stockholders are collecting a nice risk premium these days.

This has the potential to shift allocations for those who are willing to make short-term adjustments. I’m not making any major moves just yet but this is something to keep in mind, and if valuations keep getting better with falling stock prices I may be looking for any extra cash I can throw into my portfolio.

As pointed out by several researchers, stock dividend yields have largely been below bond yields since the 1960s. In fact some data from Robert Shiller shows that the S&P 500 dividend yield stayed below the US government 10-year bond yield from 1960 to 2009 after generally being higher before that. There are many ways to measure this so what I’m seeing might not be a big reversal.  But what was old may yet be new again. As I wrote recently this is one of the many benefits of market crashes. We may fall into a good market for investors soon!

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