Today, the Dow Jones Industrial Average carries an average dividend yield of 2.7% while 10-year Treasury bonds yield less at 2.65%. Many commentators have pointed out that stocks haven’t paid more than bonds since the late 1950s, so stocks are a good bet relative to bonds. But let’s recall what Robert Prechter had to say about dividends in Conquer the Crash:
Observe that the DJIA’s dividend yield tends to be around 6.5% near moderate market bottoms. It went far higher [16%] at the bottom of the Great Depression. Conversely, the dividend yield has tended to be around 3% at major tops, including the historic top of 1929.
Did you get that? Around 3% at major tops.
So, it’s only skimpy bond yields that could make a historically low 2.7% dividend seem attractive. Those investors pointing to the “high relative stock/bond yield” would do well to take a look at the long-term charts of dividends and bond yields (from Peter Bernstein).
You will notice that until the late 1950s, stocks almost always carried a higher yield than bonds. In fact, there was a whole set of well-known justifications for why this was the case:
1. Stocks could fall in price.
2. Bonds were ahead of stocks in a bankruptcy liquidation.
3. Bonds were required to pay interest payments, but stock dividends could be canceled.
These justifications, however, went by the wayside as stocks embarked on their tremendous rally in the latter half of the 20th century.
As the second chart shows, once stock dividends fell below bond yields, things stayed that way until late 2008. And, during this time a whole new set of well-known justifications became popular:
1. Stocks could rise in price.
2. Companies only rarely declared bankruptcy, so why worry about liquidation proceeds?
3. A dividend isn’t needed because stocks provide capital gains.
So much for justifications. Rather than relying on fleeting relationships between stock and bond yields, investors would be better served by following Elliott wave analysis. Currently, our interpretation of Elliott waves suggest stocks are likely headed lower - a lot lower.
Disclosure: Long S&P puts