The dramatic decline in yields on US Treasury bonds means that investors can now get more income from dividends on S&P 500 shares than on even the longest-dated government debt, upending the traditional relationship between stocks and bonds and potentially driving more savers towards the stock market.
The yield on 30-year Treasuries has this week fallen decisively below the 1.98 per cent dividend yield from US stocks. On Wednesday, the 30-year yielded 1.94 per cent. Shorter-dated Treasury bonds and notes have offered less income than dividends for some time.
Apart from brief moments earlier this year and in 2016, investors have to look back to the 2008 financial crisis to find the last time dividends brought in more cash than all of the available Treasuries.
“It’s a really big deal,” said Jonathan Golub, chief US equity strategist for Credit Suisse. “If your primary concern is steady cash to live off then the idea that you can get a better return of capital from equities is important, but also out of sync with what we have been trained over time to think is normal.”
Income-seeking investors considering a plunge into the stock market face a dilemma, however.
While companies typically aim to increase their dividend each year and are loath to cut them even in times of stress, the collapse in long-term bond yields and the inversion of the yield curve — in which short-term yields are higher on than long-term yields — has in the past heralded a recession. A slowdown could put dividends at risk, not to mention the danger of a big fall in share prices, which have until recently been setting record highs.
As a result, a higher dividend yield is not a guarantee of outperformance by the stock market. The dividend yield for European stocks has been consistently above that of benchmark 30-year sovereign bonds in the region, yet European equities have underperformed the global stock market.
“I think the upside in equities is limited because of the uncertainty over growth and given what is going on with trade and other policy situations around the world,” said Rebecca Patterson, chief investment officer for Bessemer Trust. “People would rather own 10-year Treasuries than own the stock [market] because they have much less certainty on what will drive stocks going forward.”
The worsening trade war between the US and China has hit investor confidence, and a waning profit outlook for US companies increases the risk that listed groups may curtail dividends and share buybacks that have also helped prop up share prices. Companies in the S&P 500 are on course to increase earnings per share by 2.4 per cent his year, a drop from the 7.7 per cent anticipated at the start of the year.
Mr Golub said concern that the S&P 500 could fall bolsters the case for investing mainly in companies that pay the highest dividends, some of which — such as utilities companies or telecoms — are less affected by the gyrations of the broader economy.
“If you are concerned about a sharp deterioration in the stock market these companies tend to be less volatile and more defensive,” he said.
