Dividend Investing's Yield Gap

The aim of dividend investing is to provide a reliable stream of steady cash inflows. Investors like Warren Buffett who really take a long-term view on their investments reap the most benefits of dividend investing. Consider Buffett’s investment in The Washington Post (WPO) which now generated a massive yield of 153% on the initial investment. Likewise Buffett’s Coke (KO) investment now yields around 30% on his initial investment.

The ideal time to start a dividend portfolio is when the yield gap is positive. The yield gap is the average gross yield on equities less the annual yield on long dated bonds. Usually the yield gap is negative as bonds return a higher yield than the average yield on equities. However, in depressed markets, such as the one we find ourselves in now, the yield gap turns positive. This means that equities return a higher yield than long dated bonds. It also means that the investor should be able to purchase equities which are trading on historically high dividend yields.

Source: Guru Focus

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