Investing when equity yields are higher than Treasury yields

We are halfway through the year and stocks continue to outperform with very little volatility. As the stock market becomes more volatile, investors tend to get a little nervous. We have had a good run the last eight years and with that, the inevitable question always comes up. “When is the stock market going to correct itself?” We all know it will happen at some point, but when is anyone’s guess. That being said, let’s take a look at some real data and then form an opinion. As I write this, the 10-year treasury is currently yielding 2.204%. That doesn’t sound too good as a long term investment. Why would anyone want to buy the 10-year treasury at that low of an interest rate?
So let’s take a look at the 10-year treasury and compare it to the investing in some high-quality blue-chip stocks. Johnson & Johnson is one that comes to mind as being a very solid blue chip company. Today JNJ has a dividend yield of 2.57% annually, and JNJ has consistently increased its’ dividend year over year. Doesn’t that sound like a better investment long term than the 10-year treasury? If JNJ’s stock price rises by just 5% and you also get a dividend payout of 2.57% you are netting 7.57% before taxes. To me, this sounds like a much better investment than buying the 10-year treasury. When equity yields are higher than Treasury yields, it is a bullish indicator for the stock market. That doesn’t mean go buy high yielding equities that are not quality names. It means look to the big blue-chip names and evaluate their current valuation along with the dividend yield.
Let’s take a look at Intel. Intel is currently yielding 3.01% annually. The list I could make of big blue-chip names that have a higher yield than the 10-year treasury is too many to put in this article. The point I am trying to make is that when bond yields are less than equity yields, it is a good indication that equities may be worth owning. This doesn’t happen very often but over time it has been a good indicator that the equity markets will perform well going forward.
As always, do your research and don’t make investment decisions based on emotions or the day to day price swings. Investing takes discipline and investing on emotion is never a good strategy. All the opinions in this article are that of the authors and should not be considered investment advice for your individual portfolio. Fogel Capital does own both JNJ and Intel, but this article should not serve as a recommendation to buy either security. Each investor has his or her own risk tolerance, goals and objectives and all should be taken into consideration before investing. If you would like to discuss this article further, feel free to call us at (772) 223-9686