"As of Tuesday's close, for example, the S&P's dividend yield was 3.3%, while the 10-year T-Note was yielding 2.7% -- a spread of 0.6 percentage points in favor of stocks. To put this in historical context, the spread since 1958 has averaged 3.7 percentage points in favor of bonds."Before 1958 what now seems an inversion was the norm. The MarketWatch article quotes Peter Bernstein on when dividend yields first became lower than t-bond yields:
Thanks Jon S for the link!
"This ... was unprecedented. The two yields had come close in the past but had always backed away at the critical moment. In 1958, they reversed their historical positions and have never looked back."Why? It is difficult to say but risk aversion is the likely culprit. The time prior to 1958 was close enough to the Great Depression that many investors still feared stocks and needed to be persuaded to buy ("can I get you to buy the riskier asset?") stocks. Again from the same article (citing Cliff Asness' work) that looks at the longer term relationship of T-Bond yields and dividend yields (from 1871 to present time)
"...the key element of this bet is investors' expectations....The memory of the Great Depression lingered for years after it ended...which is one reason why stocks' dividend yields remained so high.
In contrast, the Baby Boom generation (at least possibly until now) had no traumatic memory similar to their parents' memory of the Great Depression. That in turn helps to explain why stocks' dividend yield slipped in the 1960s and beyond, relative to bonds' yields.
The bottom line? If enough investors become sufficiently traumatized by what's going on right now, and as a result more or less permanently expect stocks' volatility to remain a lot higher than bonds' volatility, then stocks' dividend yield is likely to remain above bond yields.