Dividend Stocks Still Look Attractive

The current 2.2% dividend yield on the S&P 500 may not sound very promising in absolute terms, but that yield is about the same as the yield on the 10-year bond. The difference between the dividend yield on stocks and the yield on bonds, known as the "yield gap," can be used as an indicator of the attractiveness of stocks relative to bonds. While the yield gap was slightly more attractive in March 2009 during the financial crisis, stocks are at their most attractive point since 1958. Buying stocks at that point paid off, as they returned an inflation-adjusted 8% per year over the next 10 years compared with less than 2% for bonds.

The long-run performance of stocks has been far superior to bonds. But there is no free lunch in the markets; that excess return from stocks comes at a high cost in the form of gut-wrenching volatility, which can make investors turn their backs on equities. The past decade taught many of us the painful lesson that we can't just buy stocks at any price and expect to beat bonds--valuation matters. While it's impossible to time the market in the short run, valuation measures give us a decent way to calibrate return expectations over a decade or more. Looking at the U.S. market through the lens of price/earnings, dividend yields, and our equity analysts' projections, we see a mixed bag. Stocks aren't cheap, but they seem poised to offer a decent return.

Source: Morningstar

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