This week, the Barron's cover story was their "Big Money Poll" and I stumbled across something in there that leads to a broader question worth exploring. In the article, it was mentioned that Lockheed Martin (LMT) is yielding 5.30%. That is pretty substantial for a defense contractor.
Many decades ago it was typical that stocks yielded more in dividends than bonds yielded in interest payments with the logic being that the dividends were meant to be a compensation for taking on the risk of owning the common. Along the way this changed, for most stocks anyway, and we came to expect to get more yield from holding bonds, and more price stability too.
The last decade has been odd for stocks. Although decade-long, round trips to nowhere are not unprecedented they can create a catalyst for some sort of meaningful change. After the last decade-long, round trip to nowhere, the change was an 18 year run of spectacular returns. Perhaps the change that comes from the current decade-long round trip to nowhere is a reversion to stocks yielding more than bonds--if so, then really it started a couple of years ago.
We are not there yet at the index level as the S&P 500 is still close to 2% which if we looked we might find is attributable to the relatively large financial sector not paying much in the way of dividends. I made a reference the other day to how many semiconductor stocks yield close to 4% and if you look around you will find many more stocks (excluding REITs and MLPs) with pretty serious yields.
At March 2009 the SPX yielded more than the ten year as a function of the yields for both stocks and bonds being distorted. Bond yields are still distorted, but as of right now stocks are clearly not at a panic low and so probably not distorted, at least I don't think they are.
If this is a reversion to a bygone era where many stocks will yield more than many bonds then this would not be a valuation call to buy equities as the idea here is that this could persist for a couple of decades. This is not to say that stocks aren't cheaper just that I don't think it is a catalyst to immediately rocket higher.
One positive from this could be that yield from a portion of the equity part of the portfolio could offset the reduced yield that most people are having to endure from the fixed income side of the portfolio. The downside, and this is more behavioral, is that too many people will get caught at some point with too much equity exposure for not remembering that dividend stocks are not high quality bonds.