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Wednesday
Sep142011

A Battle of the Yields: Stocks vs Bonds

There's been a lot of discussion recently regarding the fact that many individual stocks are yielding more than Treasuries.  Following the August decline in equities, the yield on the entire S&P 500 actually surpassed the yield on the 10-Year US Treasury.  Historically this has been an incredibly rare event. 

Looking at individual stocks, the number of companies that have a higher dividend yield than the 10-year is almost mind-boggling.  As of today, 233 (46%) of the stocks in the index have a higher yield than the 10-year, and more than sixty pay out a yield of more than twice the 10-year.  

In this environment of relatively high dividend yields, the important question for investors to consider is whether or not the dividends are safe.  A lot of dividend yields are high for a reason and indicate increased risk.  Often times if a stock has a high yield, the market is probably not too confident in the company's prospects of being able to pay out that dividend.  We all remember back in 2008 that a lot of financial companies were high yielders, but eventually those dividends were either greatly reduced of suspended.

What makes the current period somewhat unique is that to this point it seems as though there have been more dividend increases than decreases.  As just one example, just this morning Phillip Morris International (PM) announced a 20% increase in its annual payout, raising its yield from an already attractive 3.9% up to 4.7%.  Dividend increases like this are not the type of behavior you would expect to see if companies were concerned about their ability to pay dividends in the future.

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