Dividend and Bond Yields: Back to the Future

Long-time Wall Street professionals must feel that they're living through their own version of Back to the Future. This time the tale is confusing and nerve-wracking, rather than wryly amusing. In large part, the stress reflects uncertainty over the message in the changing relationship between the stock dividend yield and the government bond yield.

The dividend yield on the Dow Jones industrial average is 2.81 percent vs. 2.48 percent on 10-year Treasuries. The dividend yield of 2.13 percent on the S&P 500-stock index, a broader market gauge, remains below the 10-year Treasury yield but the gap is narrowing. The yield differential is currently at 44 basis points (a basis point is one one-hundredth of a percent) vs. an average of 107 basis points in June, and 202 basis points in April. The first time that the dividend-bond yield relationship of the past half century got reversed was on Nov. 18, 2008. While that didn't last long, the dividend yield is once again climbing with the recent fall in stock prices.

Source: Business Week

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