- Bloomberg – The Daily Prophet: Dividends, Bond Yields And False Narratives
The latest favorite target of the bears is the fact the dividend yield on the S&P 500 Index has fallen below yield on the two-year Treasury note for the first time since 2008. The uber-investor Jeffrey Gundlach of DoubleLine Capital made note of this seeming upside-down relationship, suggesting that stocks are overvalued. But as Bloomberg News’ Ye Xie points out, for most of history, dividend yields have stayed below two-year Treasury yields, with trailing 12-month dividend yields some 2.58 percentage points below note yields on average since the end of 1977. That makes sense, because most people who invest in stocks aren’t looking for steady income, but capital appreciation. In an economic expansion, companies are more likely to increase capital expenditures for more business opportunities than to increase payouts to investors, Ye Xie reports.
- Financial Times – Five markets charts that matter for investors
Dividend paying shares have been very popular with investors in recent years, reflecting the paucity of fixed returns in the bond market. That picture is shifting and now for the first time in almost a decade, the average 12-month trailing dividend yield for the S&P 500 is below that of the two-year Treasury note. As the Federal Reserve slowly tightens monetary policy, so the two-year yield has naturally risen, but it remains well below the levels seen before the financial crisis. At this juncture, the case for stocks appears reasonably fair and better than owning Treasuries and shouldn’t spur yield seekers such as retirees to switch towards bonds. The S&P dividend aristocrats, or the fifty blue-chip companies that have increased their payouts annually for the past 25 years, still sports an average trailing dividend yield of 2.3 per cent.
Comment
Conclusion
That the S&P 500 dividend yield is back below the 2-year Treasury yield is a sign of normalcy. We don’t see any reason to believe it has any bearing. The behavior of the S&P 500 and short-term interest rates are both consistent with economic data. We see no reason to think the crossing of the two yields has any bearing on the near-term direction of either.
We agree with the observation that the yield on the U.S. Treasury 2-year note has exceeded the S&P 500 dividend yield most of the time since 1976. The chart below shows that prior to the financial crisis, there was only one period where the 2-year yield fell enough to dip below the S&P 500 yield. This was between September 2002 and February 2004.
We also noticed that regardless of the level, the spread between the S&P 500 dividend yield and the U.S. 2-year yield declines during Fed tightening cycles. This is a function of the change in the 2-year yield. Short-term interest rates increase while the dividend yield changes far less.
The correlation between the S&P 500 and the U.S. 2-year note yield is rising. High yields are increasing associated with stronger equities.