Bond vs Stock Dividend Yields

Posted on by

“Bonds have nowhere to go but down since interest rates have nowhere to go but up.” Liz Young

Investment income is vital in shaping the returns on equity and debt securities.

Comparing income and yields from bonds and dividend paying stocks are a useful metric because they are a function of both the income to be received on a security and the current price of that security, according to Liz Young, Head of Investment Strategy for SoFi.

Dividend yield on the S&P 500 vs. the yield on the 10-year Treasury are a useful because they are a function of both the income to be received on a security and the current price of that security, said Young.

The simple way to read this chart would be to say the yield on a 10-year Treasury is considerably more attractive than the dividend yield on stocks. But not all yields are created equal.

There not equivalent because investors traditionally buy stocks for their upside potential, not for their dividend income.

Whereas bonds are traditionally thought of as an income generating debt asset. Which means this metric is useful, but not the end-all-be-all decision factor. Dividend stocks are traditionally thought of as an income generating equity asset.

“Treasury bond yields could hit a ceiling (meaning prices hit a floor) and start moving in the opposite direction”, states Young. “This could be caused by:

  • A breakdown in the economy (thus increasing fear of recession),
  • A moderation in inflation, and/or
  • The Federal Reserve turning less hawkish.”

The best time to buy US Treasuries was in the early 1980s, when interest rates were peaking, and high fixed rates were destined to look good over the long term.

“Bonds have nowhere to go but down since interest rates have nowhere to go but up”, says Young. Bonds would not function effectively in the current rising interest rate and historic inflationary environment to protect investors’ downside risk. Bonds would not offer protection to downside shocks in stocks.

Historically speaking, it’s best for investors to avoid bonds when central banks print money. More cash can lead to inflation, which can lead to central banks raising interest rates higher—and put a damper on any fixed-rate assets.

“Never depend on a single income; make an investment to create a second source.” Warren Buffett

References:

  1. https://www.sofi.com/blog/liz-looks-stocks-vs-bonds/
  2. https://www.forbes.com/sites/brettowens/2020/08/06/the-7-best-and-worst-bonds-to-buy-right-now/
Advertisements