There has been a lot of discussion lately about yield inversion. In the finance world an inversion occurs when short term interest rates are higher than long term interest rates. We have written extensively about this subject in prior letters and Par 3 articles. This time, however, we want to bring up a different inversion that few are noticing. It is the inversion of dividend and bond yields.
For the first time in ten years, the dividend yield on the S&P 500 is more than the yield on 30-year Treasury bonds. Note, these yields were briefly equal in June 2016 following the Brexit vote in the U.K. Also, during the 1940s and 1950s stock yields were persistently higher than bond yields – mainly because companies paid out all of their profits instead of keeping retained earnings.
But historically, this phenomenon has been a catalyst for positive stock returns moving forward. Roughly one-half of the companies in the S&P 500 now yield more than the 30-year Treasury. ONE HALF!
Yield inversions around the rest of the world are even more interesting. Long term interest rates in all other developed countries in the world range from -1.1% to 1.2%, while their stock dividend yields range from 2.2% to 5.2%. On average, foreign stocks yield 3.8% more than their long term bonds.
For investors needing income, stocks are a more attractive option. It will be interesting to see how capital markets respond to this new paradigm and how long term investors will tolerate low yielding assets. It may take a little time, but our hunch is that investors will gravitate more toward equities over the ensuing decade.