Felix Salmon

The Dow yields more than 10-year Treasuries

By Felix Salmon
July 1, 2010

Calculating the dividend yield on stock indices is more of an art than a science, since no one knows for sure exactly what dividend the stocks in any given index are going to pay over the next year. But one good estimate puts the dividend yield on the Dow at 3.1%, while Eddy Elfenbein has calculated it to be 2.9%. Either way, it’s higher than the current yield on the benchmark U.S. Treasury bond, which was last seen at 2.89% and falling.

What this means is that if the Dow’s stocks, and their dividends, go absolutely nowhere over the next 10 years, they will still outperform Treasury bonds. Which doesn’t necessarily make either asset class a good investment: it’s entirely possible that both stocks and bonds are going to go down rather than up over the next decade. But it does say to me that stocks are increasingly attractive, on a relative basis, when compared to bonds. And if you’re valuing stocks on some kind of discounted-cash-flow basis, then your valuations should be soaring right now, as long-term interest rates continue to fall. Which probably just demonstrates the limitations of DCF analysis more than anything else.

5 comments so far | RSS Comments RSS

risk free rates maybe heading lower but risky blended rates are not, it is the latter you should use for dcf. that said, i agree it’s got serious limitations.

Posted by KJM | Report as abusive

Depends on what you are discounting. Finance 101=WACC. Using both your methods would yield terrible results. Garbage In Garbage Out.

Posted by MRLAMF | Report as abusive

There is more to stock return than dividend yield. How about total return? Considering return while excluding risk does not help.

Posted by BahM | Report as abusive

So what, tell it to the Japanese!

Posted by DrEvil | Report as abusive

If you like the dividend yield now, just wait six months. It’s about to become _awesome_. Or at least that’s my bet.

Posted by ckbryant | Report as abusive

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