Time Frame: Long
Category: Fundamental

Description

Long term investors often compare the dividend yield of the S&P 500 Index to that of long bonds (30-year treasury bonds). This comparison is a measure of the attractiveness of stock dividends relative to interest income. This spread between long-term yields and dividend yields represents a rate of return which the stock investor must achieve though capital gains in order to equal the rate of return in bonds. As bond yields rise relative to dividend yields, bonds become a more attractive investment since stocks would have to generate higher capital gains to provide an equal overall rate of return.

Calculation & Significant Levels

Long Bond Yield - Dividend Yields: Calculated by subtracting the dividend yield of the S&P 500 from the long bond yield. A spread of over 6% is considered bearish, and a spread of under 5% is bullish.

Formula: (Long Bond Yield) - (S&P 500 Dividend Yield)

Gauge Elements: Magnitude
Updated: Weekly (as of Friday close)

Strategy