The Chart That Should Scare Every Bond Investor
October 8th, 2012 by Marc ProsserBonds look very, very, expensive compared to stocks when focusing on their ability to generate income. Large Cap Stocks (the S&P 500) are now paying a higher dividend yield than the 10-year treasury. This is very unusual. Since 1990, the treasury note / S&P 500 Dividend yield ratio has averaged 2.4. As stocks have a track record of dividend growth and a treasury bond has a fixed coupon payment, it makes sense that stocks should generate less income than bonds at any one specific point in time. However, something right now is not right!
The yield on the S&P 500 is not exceptionally high or low compared to its historical average, suggesting that the stock market is more or less functioning normally. However, the 10 year Treasury is trading about ⅓ of its historical average.
Average Yield On 10 Year Treasury Bond Yield (1990-2012)
5.06%
Yield On 10 Year Treasury Bond Yield September 18th, 2012
1.82%
Average Yield On The First Business Day In January and Sept includes September 18th 2012 as a datapoint.
Average Dividend Yield On S&P 500 (1990-2012)
2.11%
Dividend Yield On S&P 500 On September 18th, 2012
1.94%
Average Yield On The First Business Day In January and Sept includes September 16th 2012 as a datapoint.
Historical Ratio of 10 Year Treasury Yield To S&P 500 Dividend Yield
2.4
Current 10 Year Treasury Yield To S&P 500 Dividend Yield
0.9
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JJ
October 9, 2012
Scared ? ? ?
melodramatic , eh , mate
Bob
October 9, 2012
Where the hell is the chart? Jeez
Randy Slack
October 16, 2012
“As stocks have a track record of dividend growth and a treasury bond has a fixed coupon payment, it makes sense that stocks should generate less income than bonds” – can you explain this? This sounds totally backwards. If you pay $100 for a stock and a $5.00 annual dividend increases by 5% per year, whereas a 5% fixed coupon payment on a $100 bond would remian flat, it makes sense that the stock should generate MORE income than the bond, not less.
davidwaring
October 16, 2012
Hi Randy, Thanks for the comment! I can see how that sentence is confusing and have updated at to read “at any specific point in time”. The stock will generate more income than the bond over the long term which is the reason why stocks normally pay a lower dividend in percentage terms than bonds. Also keep in mind that over the long term stocks generally go up so the percentage may remain constant for a stock even though the dollar amount of the dividend is increasing.
Hope that helps. Let us know if there are any other questions.
Thanks
Dave
Randy Slack
October 16, 2012
Thanks, that clarifies it.
Avid Reader
October 16, 2012
where have you been? over the last several years the following has happened: in 2009 people rushed to Govt Bonds for secutity — raising values and lowering yields (unless you meant COUPON yield). More recently BANKS are buying 10 yr bonds, increasing their cost and driving down yield/cost. Also, as companies increase dividends, usually the prices increase as well, so the yields don’t increase as much as you’d think. Or am I missing something?
davidwaring
October 16, 2012
Hi Avid,
Thanks for the comment! While yes we know bond yields have been falling and understand the reasons, we found it interesting that they now yield less than stocks which has not been the case for many decades, if ever. Thats the point of the article, not simply that bond yields are low.
Thanks
Dave