The S&P Dividend Yield Beats 10 Year T Notes for First Time in 50 Years

Mark Hulbert over at Marketwatch posted an interesting article that discussed how for the first time in 50 years the dividend yield on the S&P 500 beat the yield on 10 year Treasuries. As of yesterday's close, the S&P's dividend yield was 3.3%, while the 10-year T-Note was yielding 2.7%.

So what does this mean? According to the article, volatility may be the answer:

"Cliff Asness, however, thinks he has come up with some clear answers. He is managing and founding principal at AQR Capital Management, a Greenwich, CT-based quantitative research firm. In the March/April 2000 issue of Financial Analysts Journal, Asness argued that neither the pre-1958 period nor the decades since are anomalous. On the contrary, he found that -- below the surface -- stock and bond yields have always been strongly positively correlated. Read Asness' article

The reason that this strong correlation was hidden, according to Asness, is that investors' expectations have changed of the relative volatility of stocks and bonds. Prior to the last 50 years, investors expected the stock market's volatility to be much greater than bond market volatility. To entice investors to incur that greater volatility, the stock market had to provide a higher yield than bonds."

Of course, there could be another much simpler answer. Yields on Treasuries have dropped because investors are flooding into them in unprecedented numbers as a safe haven. In past recessions, investors could park money in money market funds, or corporate bonds, or auction rate sucurities, but even those relatively "safe" vehicles are no longer so. Yields on Treasuries have dropped so much that the 3 mos Treasury basically pays no interest.

At the same time, the crash of the S&P has been so swift that companies haven't had time to adjust their dividends to reflect the new economic reality. If companies start cutting dividends to conserve cash, as many expect to happen, the dividend yield of the S&P will drop further. After all, dividend yields are not guaranteed like bond yields.

Either way, the fact these lines have crossed is an indicator that we are in extraordinary times.