almost 2 years ago • 1 min
The chart above shows the difference between the yield of 10-year US government bonds and the dividend yield of the S&P 500. When the black line is on the rise, you’d earn a higher yield from a long-term bond than you would from the index, and vice versa. That makes it a good way to compare whether bonds or stocks are better value at any given time.
During 2020’s Covid crash, for example, stocks looked more attractively valued than bonds based on this metric: bond yields had dropped so low that opting for stocks’ higher dividend yields and higher capital gains potential was a no-brainer. Since then, though, the situation has reversed: inflation has driven central banks to raise interest rates, which means bonds are now yielding 1.5 percentage points more than company dividends. That’s the biggest gap in a decade.
Of course, this relationship doesn’t take into account stocks’ and bonds’ potential for capital gains, nor other factors like share buybacks. That means comparing what stocks and bonds are worth solely based on their yields is an imperfect strategy. But on the face of it, this metric suggests you’d get more for your money right now by investing in bonds rather than stocks. That’s especially true if you’re anticipating an economic slowdown: bonds would provide a wider margin of safety than stocks, and they’d offer the potential for capital gains if central banks are forced to cut interest rates – a move that would send bond prices skyward.
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