Don’t Put Your Money Into 10-Year Treasury Notes Just Yet

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A funny thing happened in the midst of the recent market meltdown … something important that few other have yet to notice.

Don't Put Your Money Into 10-Year Treasury Notes Just YetThe dividend yield for the S&P 500 inched its way above the interest yields on 10-year Treasury notes.

Which means that during all of this panic over the market selloff, stocks have collectively become better income investments than fixed income instruments. Such as Qualcomm’s (QCOMyield of 3.5% and Kinder Morgan’s (KMI) 6.5% yield.

Granted, the market only backed into the relatively attractive dividend yield, and it’s only because interest rates are comically low that dividend stocks have even been close to giving the 10-year Treasury any serious competition.

Nevertheless, the intersection of the payout rates for these very different instruments has some pretty serious implications for folks in the income as well as the growth camps.

10-Year Treasury Bonds — Guilty by Circumstances

Take the numbers with a grain of salt since they’re always in flux, but thanks to the steep pullback from stocks late last week and early this week, the S&P 500’s dividend yield is right around 2.23%.

Meanwhile, the dovish Federal Reserve minutes from July’s Federal Open Market Committee meeting revealed that Janet Yellen may not be as rushed to raise rates as previously thought. The end result is a 10-year Treasury yield of 2.12%, factoring in Tuesday’s sizable dip in bond prices.

Yes, for the first time in a long time, it makes more sense for income investors to own dividend stocks than it does Treasuries.

It’s not an apples-to-apples comparison, of course. With government-backed bonds you essentially undertake no risk, so you shouldn’t expect a major reward. Conversely, even among the safest of dividend stocks, your capital (not to mention the dividend itself) is always in jeopardy, so one would expect to be compensated for that risk. Still, from a historical perspective, this is a pretty unusual situation that makes a strong bullish case for owning stocks.

In other words, yes, add this to the list of reasons to think the market may already be at or near a bottom.

Uncharted Waters

For those seeking clear empirical evidence that a deeply devalued stock market (evidenced by unusually high yields) rallies well when government bonds offer little in comparison, prepare to be disappointed.

There is no clear evidence to that end, if only because the market has pushed its way into an unprecedented situation with such a prolonged period of tepid bond yields. The market’s dividend payout has actually remained on the stagnant side.

The chart below tells the tale.

Historically, yields on intermediate-term government bonds like the 10-year T-Note have been leaps and bounds better than the dividend yields for the broad market. In the wake of the 2008 tumble from equities, however, interest rates and dividend yields moved into the same area where they’ve largely stayed ever since.

Comparison of 10-year Treasury Yields to Stock Markt Dividend YieldsGenerally speaking, market-wide dividend yields greater than a 10-year T-Note yield are associated with a bullish stock market. However, based on the limited amount of data where the phenomenon has been observed, it’s difficult to say there’s a cause-and-effect relationship.

On the other hand …

Bottom Line

While there’s no statistical evidence that relatively strong dividends (relative to risk-free bond yields) is bullish for the market, there is a common sense aspect to the premise: If investors aren’t being compensated for forgoing growth opportunities by owning treasuries rather than stocks, why not just own stocks?

There’s a flip side to that coin, of course. Falling bond prices could just as easily make bond yields the stronger payer of the two instruments. And, although the Fed effectively postponed a rate hike with its most recent published outlook, higher bond yields are on the horizon. Simultaneously, every step the market takes attributes to a sinking dividend yield.

Yet, there’s no plausible rate-hike schedule and no super strong stock market rally in the cards that could dramatically widen the disparity between the payout on stocks and a 10-year T-Note.

Even if bond yields overtake dividend yields again (which they eventually will), more than a few investors will struggle to see a meaningful difference on a risk vs. reward basis. The fact that we’re even able to have this discussion speaks volumes about the dynamic that’s quietly become bullish for stocks.

This is, of course, what the Fed’s been trying to do all along — push capital out of low-yield instruments that don’t spur growth and into higher yielding investments that do.

Whatever the case, the logical thing to do now is view stocks as a relatively stronger option than bonds … however strange that may be.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/08/10-year-treasury-dividend-stocks/.

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