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The dividend yields on stocks are near a record high relative to the yield on bonds right now, providing one great reason to load-up on the former and ditch the latter. But is that what you should be doing?
The U.S. Federal Reserve would like it that way. In keeping its key interest rate so low and holding down longer-term bond yields, it hopes to drive investors into stocks.
However, strategists at Brockhouse Cooper have different thoughts on the matter. They looked at how various equity markets performed after their respective dividend-yield-to-bond yield ratio peaked, and found that stock returns were nothing special.
"The analysis provides no evidence that high dividend-yield-to-bond-yield ratios provide excess returns relative to the Datastream World Index," they said. "In many cases, these markets saw losses relative to the world in both the short and long term after exhibiting peak dividend-yield-to-bond-yield ratios."
As Brockhouse Cooper itself points out, most countries saw a peak in the ratio between stock yields and bond yields during the financial crisis – and of course a crippling global recession and bear market soon followed. So they looked at the performance of G7 countries before 2008, when equity yields sometimes also exceeded bond yields. But, again, they found no consistent outperformance relative to the world.
In other words, the high ratio of stock to bond yields is not a buy signal for stocks.
"Over the long term, as the economy improves, the ratio will diminish but over the short term, given the bleak global economic outlook, we do not believe that current high dividend-yield-to-bond-yield ratios are enough of a reason for investors to jumpback into equities," they said.
David Berman