For several months, at least some investors seeking income have fled the bond market and headed toward the stock market because stock dividend yields were higher than than bond coupon payments.
This was a considered a tailwind for the stock market.
However, with this week’s — and this month’s — sell-off in the bond market, prices have come down so much that bond yields are now higher than stock dividends.
Here’s BMO Capital’s Brian Belski:
One of the biggest advantages stocks have enjoyed lately has been relatively high dividend yields when compared with bonds. Based on our work, this has provided a significant boost to stock market performance. For instance, ever since the S&P 500 dividend yield consistently exceeded the 10-year Treasury yield (in this cycle), stocks have gained an average annual return of 24.1%. This compares with 18.2% for periods where the dividend yield was below the Treasury yield and 5.5% if you exclude the “rebound” year of 2009. Needless to say, the yield advantage has clearly provided a strong tailwind for market performance, and in our view, made the “re-allocation” decision for skittish investors a little easier. Unfortunately, recent higher rates have pushed the S&P 500 dividend yield back below the 10-year Treasury yield for the first time in almost a year and a half — a trend that is likely to continue given Fed posturing.
This is not to say stocks aren’t attractive on an absolute basis. However, the relative value offered by stocks over bonds has narrowed significantly.
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