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Bonds look very, very, expensive compared with stocks when focusing on their ability to generate income. Large-Cap Stocks (the S&P 500) are now paying a higher dividend yield than the 10-year treasury. This is very unusual. Since 1990, the treasury note / S&P 500 Dividend yield ratio has averaged 2.4. As stocks have a track record of dividend growth and a treasury bond has a fixed coupon payment, it makes sense that stocks should generate less income than bonds. However, right now that's not the case.

The yield on the S&P 500 is not exceptionally high or low compared with its historical average, suggesting that the stock market is more or less functioning normally. However, the 10-year Treasury is trading about ⅓ of its historical average.

(click to enlarge)

Average Yield On 10-Year Treasury Bond (1990-2012):

5.06%

Yield On 10 -Year Treasury Bond September 18, 2012:

1.82%

Average Yield On The First Business Day In January and September includes September 18, 2012 as a data point.

Average Dividend Yield On S&P 500 (1990-2012)

2.11%

Dividend Yield On S&P 500 On September 18, 2012

1.94%

Average Yield On The First Business Day In January and September includes September 16, 2012 as a data point.

Historical Ratio of 10-Year Treasury Yield To S&P 500 Dividend Yield

2.4
Current 10-Year Treasury Yield To S&P 500 Dividend Yield

0.9

While short-term investors may want to take this information as a sign to shift more of their portfolio into stocks, we recommend long-term investors stay the course. For more on why see our article on the 60/40 rule of investing.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.