DEUTSCHE BANK: Here's the embarrassing reason some people dreamed up for buying stocks this week

This week, the dividend yield on the S&P 500 eclipsed the yield on the 10-year US Treasury note.


And according to Deutsche Bank, this is the reason some folks were arguing you should buy stocks over bonds.

The idea here is that if you buy the S&P 500 index — say, through a mutual fund or exchange-traded fund — you get a dividend payment that is currently higher (on a percentage basis) than the regular payment received from owning a 10-year Treasury note.

As of Friday, the S&P 500 dividend yield was around 2.15%. Earlier this week, the 10-year note was yielding around 2.12%

But in the Deutsche Bank’s latest “db140Weekender,” a note sent out on Friday’s giving insights on the week’s developments in 140 words or less, the firm thinks this is a terrible idea, writing:

Wall Street soothsayers are advising investors to buy shares this week because the S&P 500’s dividend yield overtook the ten-year treasury yield. Their arguments, however, are based on logic worthy of the late Yogi Berra’s finest neologisms. For starters, there is the rank inconsistency — few stockbrokers recommend selling equities when yields cross over in the opposite direction. And even if comparing yields does convey a relative value signal, it is as much a trigger to sell bonds as it is to buy stocks. But then, there are plenty of things that should not work in theory but do in practice, as Ben Bernanke quipped about quantitative easing. Alas, the dividend versus bond yield spread is not one of them. Over the past 60 years this yield spread is negatively correlated with equity returns over the subsequent five or ten years.

And while we think Deutsche Bank might be a little unfair entangling Yankee great Yogi Berra — known for his quips which, while sometimes seeming nonsensical, were in fact more incisive than 99% of commentary about life — with the latest hair-brained idea being peddled by stockbrokers, the call-out here is sound.

Bonds are purchased for their regular coupon and relative stability.

Stocks are purchased for their potential future price appreciation, with the dividend coming, in many cases (not all, of course), as an added bonus.

Here’s the chart of the dividend yield.

And the 10-year Treasury note.

NOW WATCH: Fed’s Bullard explains the problem with keeping rates at zero forever

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.