The equities market and dividend stock exchange traded funds may be relatively cheap, compared to the fixed-income market where Treasury bonds have surprised.
Some point out that the spread between the dividend yield on the S&P 500 index and the yield on benchmark 10-year Treasuries has recently went negative, with equity yields higher than the fixed-income asset, writes John Melloy for CNBC.
Currently, the SPDR S&P 500 ETF (NYSEArca: SPY) shows a 1.87% 12-month yield. Meanwhile, dividend-focused ETFs also show slightly better yields. The Vanguard Dividend Appreciation ETF (NYSEArca: VIG) has a 1.95% 12-month yield, SPDR S&P Dividend ETF (NYSEArca: SDY) has a 2.21% 12-month yield, and Schwab US Dividend Equity ETF (NYSEArca: SCHD) has a 2.63% 12-month yield. In contrast, the yield on benchmark 10-year Treasuries were hovering around 1.9% Thursday. [Banner Year of Dividend Growth Sends Cash to Dividend ETFs]
To put this shift in perspective, the negative yield spread between stocks and Treasuries has only occurred three times in the past 60 years, with two of those times forming over the past seven years, and historically preceded large gains for equities.
“We think the equity markets are working themselves into a good ‘buy spot,'” Jeffrey Saut, the chief investment strategist of Raymond James, said on CNBC, citing research note figures from Bespoke Investment Group that show the strong historical track record.
Bespoke found that the S&P 500 increased 33% on average for the one year period after the equity and fixed-income spread went negative.
However, some strategists warn that this might have been a result of a post-financial crisis environment where the Federal Reserve’s ultra-low-rate policies shaped the markets. Additionally, others warn that the markets were also trading at extremely oversold levels prior to the negative spread differential, so investors should not expect a similar surge in market gains.
Vanguard Dividend Appreciation ETF
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Max Chen contributed to this article.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.