Normally, investors buy bonds for income, and don’t expect to get a whole lot of growth from that part of their portfolio.  And they buy stocks primarily for their growth potential.  Right?

Well, recently, as stock prices have crawled sideways and Treasury rates have dropped, the U.S. markets have given us something that experienced investors haven’t seen since the 1950s.  The average dividend yield on stocks in the Standard & Poors 500 index (1.95%) has moved up past the yield on 10-year Treasury bonds (currently hovering around 1.93% a year).

In other words, investors can get the growth potential of a stock investment, but be paid more, in current income, than they would get from plain vanilla government bonds.

In days of yore – before roughly 1955 – it was accepted wisdom that since stocks were risky, investors should be paid more to own them.  As you can see from the chart below where the blue line is Treasury rates and the red line is large cap stock dividends, there have been times when stock investors were paid a LOT more, in part because of depressed share prices during the Great Depression, but overall because investors were willing to accept less market risk than they have been for the past half century.

The chart also shows the opposite extreme.  In the 1980s, when inflation drove bond rates through the roof, companies focused on providing capital gains rather than current income at the period’s high tax rates.  Why pay dividends when you can plow earnings back into operations and turn ordinary income into capital gains?

It is hard to know how long we’ll be able to buy stocks that pay us higher yields than we’re getting on our Treasury investments.  As you can see from the chart, dividends are still fairly low by historical standards, and any uptick in stock prices would drive that red line correspondingly downward.  Similarly, analysts keep telling us that Treasury rates can’t keep dropping forever.  So for now, let’s enjoy an unusual market opportunity that investors last experienced back when Dwight Eisenhower was President, one of those interesting moments in investment history that you probably won’t see covered by the investment press.

With inflationary pressures growing, it makes sense for some of a portfolio’s fixed income investments to be allocated to certain “safe” stocks for enhanced yield as well as potential for growth.

Sources:

Treasury rate:  http://www.multpl.com/interest-rate/

S&P 500 Dividend rate: http://www.multpl.com/s-p-500-dividend-yield/