Are Equity Yields A Screaming Buy - Or Reversion To Reality?

Tyler Durden's picture

In many countries around the world the main equity market has a dividend yield above its 10 year bond yield and in many cases its average IG credit yield. Although this isn't the first time that such an outcome has been seen through history, at a minimum it's reversing what has been a 50-year-plus trend where equity dividends were below bond yields. Currently, the US, UK, Germany, and France all have equity dividend yields above their 10 year govvie. However, before the world and their pet snake Sebastian decide this is the buying opportunity of a lifetime, a little more context shows that this was the normal from the start of the 20th century to around the end of World War II. In fact - if we replace government bond yields with corporate bond yields the picture appears to be a huge mean-reversion back to pre-World-War II relative valuations (where dividend yields were consistently higher than corporate bond yields). As Deutsche's Jim Reid notes though - it is more likely that it might be that fixed income and equities are both expensive as central banks have artificially elevated prices in everything in an attempt to keep the financial system solvent - and furthermore this is not the time for epic asset allocation switches.


Quite clearly, there have been two very significant regimes with regard the relative valuation of government bonds and equities. We suspect few have seen the full history as all too often the argument of high relative equity yields is only considered in the last 50 years...


and looked at on the more apples to apples basis of corporate bond financing vs equity capital (corporate bond yield vs equity dividend yield) - it is clear that we have seen two huge phases (red and green) and perhaps where we currently sit is a reversion to the pre-WWII spendathon era relative value perspective of stocks and bonds...

Charts: Deutsche Bank

Via Deutsche Bank:

There is little doubt that on the dividend vs. bond yield measure, equities look as good relative value as they have done for at least half a century. However it’s fair to say that both yields are low in absolute terms, but that bonds are at extreme levels relative to history.


Are the more competitive equity yields a threat to bond markets as funds look to switch out of fixed income for better value? It’s easy to conclude that the answer is yes but fixed income yields still need to be as low as the authorities can make them to ensure that the debt mountain that virtually all developed countries have across public and private sectors are funded smoothly. With this in mind it’s unlikely that regulatory flows will move substantially away from fixed income in the near future. We also may still see risk aversion regularly hit markets which will generally keep the bid for perceived safe havens high.


So while equities may out-perform bonds over any sensible medium-term horizon from this starting point, we’re not sure it will be through a conscious asset allocation switch. It will be more through dividend accumulation and re-investment against ultra low bond yield competition.

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swissaustrian's picture

Everything you need to know about coupons vs dividends is shown in the first chart.

buzzsaw99's picture

dividends will be way up for Q4

TruthInSunshine's picture

They're going to increase dividends 1200% on average to try and keep overall returns flat for at least the first month of 2013.

trebuchet's picture

us bond yield masisvely above div when credit boom on fiat money occured  post Bretton Woods. div yields were down as companies went for growth in response to credit boom,

 that graph is totally compatible with current deleveraging scenario and doesnt represent equity market collapse, represents improved world order based on "proper" risk/return structure in a low ( non credit induced) growth scenario


Of course fed and CBs around the world are trying to inflate that and drive up "false" growth but corporates are not buying it so easily. 


End of the world? No

Return to sanity? yes, slowly

Fuck of Fed/CBs/Easy money? yes definitely.  Doesnt matter what banks lend/borrow at the margin of money supply CREATION - it is what is happening at money supply Destruction margin  i.e. bank to household/corporate/ gov lending that matters. 


CPL's picture

Market did the same thing in Dec 2008.  Everyone dropped some really nice dividends.  Then the market shat the bed because I don't think anyone is interested in the buyback plans on these unless you are an over zealous DRiP investor.


Holding more equities in USD is not where you want to be in five years or one year.

TruthInSunshine's picture

I need to come up with a template so I don't have to keep typing it out (though it's not that long):

Bernankadonk, FUBAR'd markets. And God Speed, Muppets, especially after the fiscal cliff gets "resolved," which it will soon (and will crush the souls of the many).

duncecap rack's picture

They both suck. The only thing that pays now is having a freind with a printing press.

Its_the_economy_stupid's picture

One of the most telling posts in recent memory.

TruthInSunshine's picture

HFT ping pong, funded by federal reserve (and other central fractional fiat banks') "liquidity:" 

7 to 13 entities, part of the too-big-to-fail crowd (through their own operations or subsidiaries or even proxies) swap shares of "equities" back and forth with them themselves, while Timmay & Ben at the PPT run the nightime futures table all night, every night.


Its_the_economy_stupid's picture

but can it continue for a decade? I want to know!

TruthInSunshine's picture

Riddle me this:  If there are two entities, A & B, who sell an asset back and forth again & again to each other, which entity will book a profit, and at what point? Conversely, which entity then books a loss, and at what point?

trebuchet's picture

both can technically book a profit in this fiat word as long as the lending to buy the asset in the first place was below the asset return in the second place. 


old story of two firms raising each others' costs and the way to cover the cost is to the raise the price of the sale of the asset to each other -> upward asset price spiral otherwise known as a bubble, when somone, sonewhere calls in the initial (REAL) cash/deposit that started the upward spiral in the first place

CPL's picture

And someone is there to suck up the loss, in the current case, tax payers.

So what breaks first?  The dollar or the society holding it?

game theory's picture

When short term rates in the US go negative, we shall see a frenzy of price discovery.

Its_the_economy_stupid's picture

Is the answer never as long currency inflates?

akak's picture

When was the last time that a currency deflated, i.e., saw an INCREASE in its purchasing power?

The US dollar in 1929-1933, and the British pound in the 1920s. are the ONLY examples that I can readily think of.

Its_the_economy_stupid's picture

If the Fed is as oposed to deflation as they have publicly stated, I'm wondering if the return on equities can't continue for a decade (in nominal terms)?

TruthInSunshine's picture

Sure, as long as holders of shares don't mind being paid back in relatively MORE worth-LESS fiat when they sell their shares and "book" their "gains."

Its_the_economy_stupid's picture

But that's just it. It may more more relatively worthless to yester-year, but less relastively worthless to bond interest or more importantly, Euro-denominated assets.

adr's picture

I spent the last week at a trade show discussing business with buyers from about 50 major US retailers. I think I wandered into the opening scene of Pirates of the Caribbean 3, because nobody had a clue about anything and every meeting felt like a vast empty void. When I asked about plans for 2013 I was greeted with a shrug and a I have no clue. I've also never had a buyer sit and laugh hysterically when I asked about business for the next year.

We all basically think the captains jumped off the ship with all the life preservers and left the cabin boys to fend for themselves.

2013 is going to be fun folks. Hang on tight.

cash_for_tungsten's picture

Um, the only thing I get from that chart is that bonds and stocks both suck and I should buy physical gold instead.

DowTheorist's picture

Bonds are expensive and very likely to blow up. If the key ratio BLV/GLD (long-term bond/gold term bond/gold ) turns bearish in favor of gold, then all bets are off.

While currently the BLV/GLD ratio is still bullish, hence saying that gold is not really ready to surge and bonds not ready to collapse, the technical picture shows clouds on the horizon. When the ratio turns bearish, it will be green light to gold and red light to bonds.

More about the key level to monitor here: