It’s Time to Choose Stocks Over Treasurys

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In the first half-hour of trading on Wednesday, the markets reached a grim milestone when the dividend yield of the SPDR S&P 500 Trust (NYSE:SPY) exchange-traded fund crossed the yield on the 10-year Treasury note.  The yield on the SPY stood at 2.17% vs. 2.14% for the 10-year. This marks the first time in over two years that an investor could receive a better yield by investing in stocks rather than bonds.

Federal Reserve Chairman Ben Bernanke must be beside himself with glee. The Fed, in the statement that accompanied its interest rate announcement on Tuesday, said the following: “The committee currently anticipates that economic conditions — including low rates of resource utilization and a subdued outlook for inflation over the medium run — are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.”

What the Fed is telling us is that it intends to maintain, for an indefinite period, its longstanding policy of trying to push cash out of lower-yielding investments and into higher-risk assets. In so doing, Bernanke is essentially giving investors the green light to start buying stocks again. The only thing missing was that he neglected to say “please”.

Based on the market action of the past two weeks, investors have larger worries on their minds than Ben Bernanke’s bad manners. However, the low yields on cash and Treasuries means that the Fed is likely to succeed in its quest to force money back into higher-risk assets. This is likely to put a floor under the recent downturn and provide an opportunity for investors willing to bite the bullet and buy blue-chip stocks. Consider that:

  • When the market opened on Wednesday, a full 238 S&P 500 companies now offer yields above the 10-year note. Sixty-six of these – including Intel (NASDAQ:INTC), Lockheed Martin (NYSE:LMT), ConocoPhillips (NYSE:COP), Pfizer (NYSE:PFE), and Altria (NYSE:MO) – now offer yields more than double that of the 10-year.
  • The iShares Dow Jones Select Dividend Index Fund (NYSE:DVY), after having fallen more than 13% this month, now provides investors a yield of 4.03%. Factor in earnings growth, and this appears to be a much better option than buying a 10-year at 2.14%.
  • In a study that was widely reported in the financial media last week, a Bank of America analyst pointed out that the gap between the S&P 500 earnings yield (or the inverse of the price-to-earnings ratio) and the yield on the 10-year had reached a generational high. Following the rally in bonds and this week’s downturn in stocks, the gap is even wider. The earnings yield on the S&P stood at 8.9% at the close on Tuesday, putting it a full 675 basis points above the 10-year.
  • Investors don’t need to restrict themselves to the U.S. market to pick up attractive dividends. The iShares Trust MSCI EAFE Index Fund (NYSE:EAFE) is yielding 4.5%, while the yield on the iShares Inc. MSCI Emerging Markets Index Fund stands at 2.3%.

As incredible as these numbers are, yield disparity alone isn’t sufficient to rally the markets. First, of course, there needs to be a return of investor risk appetites. Having said that, the gap in yield between stocks and bonds is now at a level that discounts a full-blown crisis. If one does not, in fact, occur – and the economy just continues to muddle along in an environment of slow growth and Fed accommodation – the current gap between the yields on bonds and stocks may represent a rare opportunity for longer-term investors.


Article printed from InvestorPlace Media, https://investorplace.com/2011/08/its-time-to-choose-stocks-over-treasurys/.

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