Dividend Yields Compared to Bond Yields (S&P 500)

The dividend yield is the return a company gives to its shareholders, and it is measured as a percentage of the share price. The average dividend yield of the S&P 500 companies can be an indicator for the relation of the price of a stock compared to the dividend the shareholder receives. 

Especially a comparison with the U.S. treasury bonds might make sense, as investors will be more and more tempted to invest in bonds instead of stocks when the treasury rates and the dividends are similar, as the risk for bonds is lower. However, you also have to keep the share price and the bond price itself in mind. When making this decision, as for bonds and stocks, the return can be made on regular payments (interest rates for bonds, dividends for stocks) and market price on a secondary market (market price of bond or stock).

Key takeaways:

  • The dividend yield is the percentage of the stock price that is paid as a dividend to the investor.
  • the lower it is, the more expensive stocks are
  • the closer the percentage is to treasury bonds, the more investors are tempted to invest in bonds, and the stock market may go down

The Theory Behind Dividend Yields Compared to Bond Yields

In long-lasting bull markets, dividends make up a smaller portion of an investor's return. The investor's return is determined by increases in the market price of a stock and by its dividends. A low dividend yield means the market has high-valued stocks that might be up for a correction. 

Setting this into relation with US treasury bonds is of specific interest. Investors in a long-lasting bull market are tempted to go into bonds if similar regular returns are paid while having less risk. This includes the notion of the market that the prices of stocks will not continue to rise significantly.

How to Use Dividend Yields Compared to Bond Yields

Comparing the S&P500 yield and the bond yield can only be used as an additional indicator. The signs are not necessarily clear but can give an additional source of information. 

Also, one has to regard that the S&P 500 dividend yield is weighted by the market capitalization of the companies in the S&P 500. Many of the biggest companies do not pay dividends, which influences the indicator. Therefore, a closer look at the data might be helpful.

Chart that compares the yields of treasuries and stock dividends
Source: Financial Times

Up-to-date data can be found here:
Current Dividend yield S&P500
Treasury yields