Friday, February 17, 2012

Treasury Bonds Yield Less Than Dividend Stocks - Investing Path

These are historic times when it comes to the economy and the stock market.? Of course, you could probably say that about almost any time in history for some reason or other.? But in this case, we are talking about how freakishly low interest rates have become.? Not only are the interest rates on savings accounts below 0.3%, but even one year CDs are well below 1% on average.? Enter treasury bonds, which usually offer a significantly better return than savings rates.? However, in this economy, interest rates have been pushed so low that even the ten year treasuries only yield 2%!? In other words, if you buy a ten year treasury bond and hold it to maturity, you will only earn 2% per year.? Let?s take a look at the treasury yield curve (below).

treasury yields are lower than dividend stocks

Source: Bloomberg

Notice on the treasury yield curve that even the 30 year bonds only yield 3%.? This is amazing considering the state of the economy.? What?s even more ludicrous is that if you buy treasuries now, you?ll actually be losing real money every month.? That?s because the highest treasuries yield 3%, but current inflation rates are closer to 3.5%.? That means that the government is actually making money on treasuries, as the cost to pay back the debt will be lower because of the decreased purchasing power that inflation brings.

Now, let?s look at the historical yield of dividends, as represented by the S&P 500.

Historical dividend yields of the S&P 500

Source: Standard and Poor and Robert Shiller

Note that the yield on the Dow Jones Industrial Average is higher than the S&P 500, but for some reason that data is not available, or at least very hard to find.? Notice that even though the dividend yield has declined over the past 20 years, it is currently at about 2 percent.? The average dividend yield of the Dow is currently 2.9%.? So what does this tell us?

For the first time in over 60 years dividend yields are higher than treasury yields!? That makes treasuries and many other bonds a pretty bad investment.? And if you?re willing to take on more risk, you?re much better off investing in dividend stocks.? Not only do dividend stocks pay about the same or more in yield now, but they are also a good hedge for inflation, and have a chance for stock price appreciation.

Another factor to consider if you are deciding between investing in bonds and stocks, is what will happen next.? While the global economy can never be predicted, there?s at least a good chance that it rises and that stocks do well for years to come.? The longer your term, the more certain your conviction can be.? However, when it comes to?bonds, interest rates have no where to go but up.? And when interest rates go up, bond prices go down.? That means that there is not really any upside into investing in treasuries or most other high quality bonds at the moment.

So, the takeaway from all of this.? Besides these are historic times and this is something interesting to think about, you may want to think twice about investing in bonds these days.

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Bonds Stocks dividend stocks, treasury bonds

Source: http://www.investingpath.com/treasury-bonds-yield-less-than-dividend-stocks.html

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