The New Normal Of Investing: Bonds For The Price, Equities For The Yield

The dividend theme has hardly run its course. As David Rosenberg of Gluskin Sheff illustrates in his latest note, the income-starved retiring boomers are being forced to garner income more and more via the equity market where dividends are up more than 8% over the past year.


Because of ultra-low interest rates, interest income growth has vanished completely. If you want income, you have to go to the lesser investment grade part of the corporate bond market, and even here, it is tough to get even a 7% coupon these days. Or you gravitate towards the dividend growth and dividend yield areas of the equity market T-bills and bank deposits protect capital but do not generate any return at all so that is a non-starter except for the most acute risk-averse folks in our midst.

And here is the great anomaly. Back in the early 1980s, investors bought equities for capital appreciation and they purchased Treasury securities for yield. Today it is the complete opposite. As the ongoing shift into hybrids strongly suggests, investors are gravitating to the equity market for a yield in a world where yield is increasingly a scarce commodity.


Moreover, investors are not buying Treasury notes and bonds for yield any more, but for the capital gain they generate - especially with The Fed's interventions taking more and more duration out of the private marketplace.


All the talk about "who in their right mind would lend 10-year money to Uncle Sam at 1.6%" obscures the fact that at low interest rate levels, returns get dominated more by the price changes in the bond. This is why anyone who, say, bought a plain-vanilla long bond a year ago at what seemed at the time to be a puny 3.7% yield, managed to experience a 22% total return: or a 44% net return for a 30-year 'strip' (zero coupon) bond.

So welcome to the new normal of investing: buying bonds for the price; buying equities for the yield.

Source: Gluskin Sheff