Some strategists have pointed out that stocks look attractive next to bonds for the simple reason that dividend yields are higher than U.S. government bond yields. In other words, why waste your time on a 10-year U.S. Treasury bond yielding 2.8 per cent right now when you can buy the SPDR S&P dividend exchange traded fund , which yields 3.4 per cent?
However, Swiss private wealth managers Lombard Odier (via FT Alphaville) point out that this strategy isn't all it's cracked up to be. Yes, the so-called dividend yield gap (the gap between U.S. stock yields and bond yields) has turned positive. But history shows that this isn't a more profitable strategy than buying stocks when stocks are yielding less than bonds.
The management firm based their conclusions on data going back to 1953, and formed their conclusions using five-year total returns (ie, including dividends) for the S&P 500. They got similar results using one-year and five-year returns.
"It is vital to buy nothing more than what is cheap today - namely dividends - and not hastily draw the conclusion that the dividend yield gap is a measure of equity valuation…," they said. You can find more about this, along with a nifty chart, at FT Alphaville (link above).