Dividend vs. Treasury Yields

by Econom­pic Data

The div­i­dend yield of the S&P 500 is above that of the ten year Trea­sury for the first time since the finan­cial cri­sis. Before that we have to go all the way back to the 1950's to find a time when this was the case.

The kicker... stock div­i­dends have only made up about 45% of total S&P com­pos­ite stock returns over the past 100 years, while Trea­sury bond coupon pay­ments have made up north of 96% of Trea­sury bonds returns over that same period (see below). What this means for an investor is unless you think div­i­dends will be cut and/or cap­i­tal appre­ci­a­tion will be neg­a­tive (i.e. cor­po­rate Amer­ica will shrink in terms of nom­i­nal value), stocks are poised to out­per­form.

My take... stocks appear to be very cheap rel­a­tive to bonds for investors with a long-term invest­ment hori­zon, while near term investors need to be care­ful as we seem to be in a world that is likely to have binary out­comes (i.e. either a boom or an absolute collapse).

The remain­ing 55% of S&P stock returns have been in the form of cap­i­tal appre­ci­a­tion, which has become increas­ingly impor­tant since the 1950's (see above), as cor­po­ra­tions rein­vested earn­ings back into their busi­nesses / bought back shares (vs pay­ing out div­i­dends), while investors eval­u­ated the rel­a­tive mer­its of equi­ties rel­a­tive to bonds (see the much tighter rela­tion­ship to bonds, which ratch­eted up P/E multiples).