Dividends Beating Bond Yields by Most in 15 Years

Dividends yields are beating bond yields by the most in 15 years, as low stock prices and cash rich companies help to boost yield.

Bloomberg is reporting that:

"The last time the number of S&P 500 companies paying dividends above the corporate bond rate approached the current level was in March 2003, data compiled by Bloomberg show. That was just after the start of a bull market in which the equity index more than doubled over five years."

A quick look at the BestCashCow dividend section shows some solid companies paying dividends well above the 3.8% offered by bond markets. Some examples include Verizon (VZ) which is currently paying over 6% and Pfizer (PFE) at 4.84% and Dupont (DD) at 3.96%.

This ratio may also be a sign that stocks are undervalued relative to bonds. The last time the ratio between dividends and bonds in 1995. If the economy avoids a double dip recession than many analysts think stocks are cheap. It's seems pretty obvious that the Fed and Government will do everything in their power to avoid a double dip.

The most visible cloud on the dividend horizon is a potential increase in the capital gains tax rate. The 15 percent tax rate on dividends could jump as high as 39.6% if the Bush era reductions are allowed to expire.

Johnson and Johnson illustrates the relationship between dividends and bond yields. Last month, J&J sold 10-year debt at a record low interest rate of 2.95%. Its stock is paying a dividend of 3.68%.