Why The SPX Dividend Yield Falling Below The 10Y Treasury Matters
Blog of HORAN Capital Advisors | Feb 21, 2017 06:33AM ET
For most of 2016 the dividend yield on the S&P 500 Index was greater than the yield on the 10-year U.S. Treasury. Historically, this has served as a positive sign for forward stock price returns. With the strong equity market returns in 2016 and the move higher since the election, the S&P 500 yield is now lower than the 10-year Treasury. In addition to the move higher in stocks, bond prices have declined as well (a higher yield) resulting in bonds now having a higher yield than the S&P 500 Index.
What may seem like meager yields for both stocks and bonds, investors have a propensity to purchase the better yielding asset. So, as bonds begin to provide competition for stocks, might the higher yield of fixed income investments turn into a headwind for stocks? CFRA recently prepared a report noting the performance of the S&P 500 Index at various yield differentials.
With the S&P 500 Index dividend yield now equaling about 2.0% and the 10-year Treasury yield equaling 2.4%, is the .4% greater treasury yield sufficient enough to serve as a constraint to higher stock prices? Historically, as the below chart shows, stock returns are not challenged until the yield difference is greater than 1%.
And finally, with the strong upside move in the S&P 500 Index since the February 2016 low, fewer S&P 500 stocks now have yields greater than the 10-year Treasury.
Get The News You Want
As the CFRA report notes, "Prior to 1990, the yield on the 500 served as a warning to investors that the market was getting over-heated. A dip below 3.0% signaled caution, while a drop below 2.7% was flashing red alert." However, as the report notes, and a worthwhile read, since 1990, companies have been more inclined to reinvest earnings back into the company as well as pursue more stock buybacks. With bond yields on the rise, bond prices are likely to see continued downward pressure. However, when the yield differential widens enough, stocks will face some headwinds as investor once again look to bonds as a source of income.
Trading in financial instruments and/or cryptocurrencies involves high risks including the risk of losing some, or all, of your investment amount, and may not be suitable for all investors. Prices of cryptocurrencies are extremely volatile and may be affected by external factors such as financial, regulatory or political events. Trading on margin increases the financial risks.
Before deciding to trade in financial instrument or cryptocurrencies you should be fully informed of the risks and costs associated with trading the financial markets, carefully consider your investment objectives, level of experience, and risk appetite, and seek professional advice where needed.
Fusion Media would like to remind you that the data contained in this website is not necessarily real-time nor accurate. The data and prices on the website are not necessarily provided by any market or exchange, but may be provided by market makers, and so prices may not be accurate and may differ from the actual price at any given market, meaning prices are indicative and not appropriate for trading purposes. Fusion Media and any provider of the data contained in this website will not accept liability for any loss or damage as a result of your trading, or your reliance on the information contained within this website.
It is prohibited to use, store, reproduce, display, modify, transmit or distribute the data contained in this website without the explicit prior written permission of Fusion Media and/or the data provider. All intellectual property rights are reserved by the providers and/or the exchange providing the data contained in this website.
Fusion Media may be compensated by the advertisers that appear on the website, based on your interaction with the advertisements or advertisers.