Dividend Yield Vs. Bond Yield

It pays off to compare the dividend yield and the bond yield in the U.S.

A very long time ago, before 1970, dividend yields on stocks were on average priced at 120% of the triple AAA bond yields. So if a bond gets you 10% return, the dividend yield would get you 12%. That’s because stocks can default and are riskier than bonds which are less likely to default.

But since 1970, this has changed.with the rise of mutual funds. The ratio of dividend yields versus bond yields dropped to around 20% (see chart below). Today we are at 100% so we are back in line with history (with stocks just a little bit overpriced). Just keep in mind that we have the 120% rule and try to follow this rule (to keep your sanity in these volatile markets).

U.S. bond yields can be found here:
//research.stlouisfed.org/fred2/graph/graph-landing.php?g=QA9 Dow Jones dividend yields can be found here:
http://www.investmenttools.com/equities/fundamentals/dow_jones_dividend_yield.htm

Comparing the Dow Jones and Shanghai Composite against Europe

Over the last few years after the 2008 crisis, I want to give a performance update for the Dow Jones vis a vis the Shanghai Stock Exchange. The Dow Jones has gone up 50% after the 2008 stock market plunge (Chart 1), while the Shanghai Stock Exchange has gone up first, but essentially lost all of its gains in the period between 2010 and 2012 (Chart 2).

Indeed, many economists have pointed out that the U.S. stock market has outperformed almost every market in the world. Marc Faber pointed this out in a recent interview on Bloomberg Radio.

Chart 1: Dow Jones Industrial Average

Chart 2: Shanghai Stock Exchange Composite Index

I want to analyze this further. How can there be such disparity? It can’t be the exchange rate between the USD and the CNY, because the Chinese yuan has only gone up 5% against the USD between 2008 and 2012. So what are the reasons?

Let’s take a look at the basic market metrics: P/E, dividends, book value in the full version of this article.