Last week, Ron Griess of the Chart Store brought to my attention a common misunderstanding about dividend yields.

The charts below show some of the thinking behind our discussions.

To begin with, the common usage of Treasuries — think 10 Year or 30 year for that matter — may not be an ideal comparison. The US sovereign debt has as little default risk as an instrument — certainly much less than any equity has in terms of risk.

Towards that end, a better measure might be comparable corporates — either Moody’s Aaa or Bbb rated corporate bonds. Note that the charts, which run from 1920 to present, may belie some current assumptions about dividends and Treasuries:


10 year U.S. Treasury Yields compared to S&P Comp Yield


Moody’s Aaa Yields vs S&P Comp Yield

More charts (30 Year Treasury and Moody’s BBB), after the jump


Long-term U.S. Treasury Yields vs S&P Comp Yield


Moody’s Baa Yields vs S&P Comp Yield

Category: Markets

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12 Responses to “How Rare: S&P Dividend Yields vs Treasuries”

  1. [...] Comparing dividend yields to various bond yields.  (Big Picture) [...]

  2. rd says:

    We may be seeing one of the major psychological influences of Modern Portfolio Theory begun by Markowitz in 1952.

    Historically, equities were seen as very risky assets with significant potential for principal loss. Therefore, investors demanded high dividend yields to help balance this risk. After all, they had to get cash out before a crappy manager tanks the company some years or decades hence.

    However, once economists could scientifically prove that equities were not super-risky and those risks could be quantified and balanced, then the equities could be viewed as a “normal” asset. Meanwhile, the previous four decades of global war and empire collapse had proven that “low risk” assets, such as sovereign bonds were not necessarily as low risk as everybody thought.

    With the gold standard, inflation was generally a localized phenomena that required active, intentional debasement of money or a major disaster like war that tanked the economy. The following decades also saw the rise of international fiat currencies, so a financial arms race began to outgrow assets faster than inflation could chew them up. Late in that process, executives began to get gargantuan options as compensation instead of cash for tax reasons, so the ability to grow the stock value at the expense of dividends became a personal quest with a huge pot of gold at the end of the rainbow for the lucky ones.

    We are awaiting the final verdict on historical over-valuation ranges of Shiller’s CAPE and Tobin’s Q to see if “this time is different” since the 2000s have soared to levels where the normal today would be severe over-valuation prior to 1999.

    I think the dividend yield issue is similar. I don’t think we will ever get back to the days when the S&P 500 dividend yield needs to be significantly greater than the 10-yr T-bond yield. However, my suspicion is that 30 years from now, people will look back and ask “How could they have thought that sub-3% dividend yields should be normal and acceptable?”

    I think the number one question out there today in finance and economics is “Does pre-WW II experience still have real meaning for the US and global economy?” Very few people appear to be discussing this but I think it is likely to be a huge Taleb “Black Swan” if the answer is discovered to be “Obviously, yes” because virtually no policy makers appear to have this on their radar screen despite Bernanke’s pronouncements.

  3. zuut says:

    Was the dollar breakout fake? And if the dollar has truly broken out, is it suggesting that there is no QE3 as markets discount

  4. Equityval says:

    The spreads in all these charts between the safer fixed income investment and the riskier (but possessing greater optionality) equity investment has shrunk in the last decade after having been fairly consistent, in each case, for the previous 20 years. Perhaps this reflects an implicit assessment of the (reduced) potential of equities to grow earnings, cash flows and dividends.

  5. klhoughton says:

    Gosh, golly, gee. Once you allow long-term UST yields to go above 4.25%–ca. 1967–the Equity Premium disappears from the dividend and becomes dependent upon the growth in companyequity.

    As the kids illiterate, Whocoodanode?

  6. I do not think it is anything to do with MPT – MPT is equilibrium finance theory.

    Another plausible rationale for higher dividend yields is the risk of capital depreciation and low returns on reinvested capital. As the economy delevers yield returns need to compensate for capital depreciation risks meaning that high dividend yields are not really a higher yield return but realistically part partial return on capital.

  7. xynz says:

    Are there any interesting trends when comparing between the yields on AAA bonds against USTs?

  8. jadogsl says:

    Why did investment grade bond yields head up after 1950 and stock yields headed down ?

    QE ended

    History rhymes

  9. McMike says:

    S&P 500 owners’ pay has declined from 6% to 2%; hmm. It’s no wonder my grandpas did so good with just an 8th grade education.

  10. rd says:

    BTW, Doug short did an interesting piece on the history of stock dividends going back into the 1800s in July:

  11. noilifcram says:

    Maybe back in the early 1900s one could compare 10y TSY yield with stocks dividend yields because almost every company paid a generous one. Fewer companies pay a dividend nowadays bringning the average yield of the S&P down and making the comparison with a bond index yield a fallacy.

    @rd +1

  12. jadogsl says:

    Good point noili

    The ‘new normal’, or is it the old normal revisited, may force stocks to pay divs again to get the public interested