Bailout

The Dow yields more than 10-year Treasuries

By Felix Salmon

Calculating the dividend yield on stock indices is more of an art than a science, since no one knows for sure exactly what dividend the stocks in any given index are going to pay over the next year. But one good estimate puts the dividend yield on the Dow at 3.1%, while Eddy Elfenbein has calculated it to be 2.9%. Either way, it’s higher than the current yield on the benchmark U.S. Treasury bond, which was last seen at 2.89% and falling.

What this means is that if the Dow’s stocks, and their dividends, go absolutely nowhere over the next 10 years, they will still outperform Treasury bonds. Which doesn’t necessarily make either asset class a good investment: it’s entirely possible that both stocks and bonds are going to go down rather than up over the next decade. But it does say to me that stocks are increasingly attractive, on a relative basis, when compared to bonds. And if you’re valuing stocks on some kind of discounted-cash-flow basis, then your valuations should be soaring right now, as long-term interest rates continue to fall. Which probably just demonstrates the limitations of DCF analysis more than anything else.

Full post as published by Macroprudential on July 01, 2010 (boomark / email).