Stocks Yield More Than Bonds

Something rare and wonderful happened last week: The average dividend yield on the 30 Dow Jones Industrial stocks surpassed the yield on the 10-year Treasury bond. As I write, the average Dow stock yields 3%, while the 10-year Treasury yields 2.93%. Since stocks provide the possibility of growth, investors are typically willing to pay a premium over bonds. When investors think future growth will be strong, the spread widens. When they're expecting a slowdown, it narrows.

Fear and greed control markets short-term, after all. When the spread hit negative 10.3% in 1932, the market was shouting from the rooftops that investors should flee stocks and hide in bonds. Stocks then nearly quadrupled over the next five years. When the spread hit 5.3% in 2000, the market was begging investors to go all in. You know what happened next.

Source: Motley Fool

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