Dividend yield vs. 10 year gov't bond

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Dead Man Walking
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Dividend yield vs. 10 year gov't bond

Post by Dead Man Walking » Thu Oct 05, 2017 7:41 pm

A friend shared the fall 2017 Janus Henderson Report with me. The report was an advertisement for their Global Equity Income Fund (HFQDX) and Dividend & Income Builder Fund (HDDVX). Part of the sales pitch was a chart comparing the dividend yield of a country's stocks to it's 10 year bond. I found the chart interesting since it may explain some of the interest in dividend paying stocks.

Country. Dividend yield. 10 year government bond

USA. 2.0% 2.3%
Canada. 2.9% 2.1%
United Kingdom. 3.9% 1.2%
Spain. 3.9% 1.6%
Germany. 2.7% 0.5%
Switzerland. 3.2% 0.0%
France. 3.2% 0.7%
Australia. 4.3% 2.5%
Japan. 2.0% 0.1%

Source: Thomson Reuters Datastream, MSCI as of 6/30/2017

Obviously, international equities may be more enticing to dividend investors.

DMW

dbr
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Re: Dividend yield vs. 10 year gov't bond

Post by dbr » Fri Oct 06, 2017 7:39 am

Yes, numbers like these make people think they are getting free money while somehow managing to ignore that stocks are not bonds. But you are correct that if a person is motivated to withdraw money by getting dividends then under present conditions they are pretty much forced to invest in stocks rather than bonds. As an aside, 2%-4% is still a pretty lousy yield and that is not even in real terms.

z3r0c00l
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Re: Dividend yield vs. 10 year gov't bond

Post by z3r0c00l » Fri Oct 06, 2017 8:04 am

Be sure to subtract the .5 - 1.5% Janus ERs from those dividends. A company more interested in selling new products than speaking frankly to customers about total return.

Grt2bOutdoors
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Re: Dividend yield vs. 10 year gov't bond

Post by Grt2bOutdoors » Fri Oct 06, 2017 8:29 am

dbr wrote:
Fri Oct 06, 2017 7:39 am
Yes, numbers like these make people think they are getting free money while somehow managing to ignore that stocks are not bonds. But you are correct that if a person is motivated to withdraw money by getting dividends then under present conditions they are pretty much forced to invest in stocks rather than bonds. As an aside, 2%-4% is still a pretty lousy yield and that is not even in real terms.
IMO comparing dividend yields to nominal bonds is a classic mistake. Warren Buffett talks about dividends paying more, but he is referring to the earnings yield not dividend yield as is commonly assumed. Purchasing equity is a call option on future appreciation and a potential for higher yields over time, but it is all tied back to earnings. Earnings that fail to materialize can result in an investor losing their entire premium if you hold on long enough. Hold a bond to maturity, you are practically ensured (with much lower default rates) of receiving your principal back on a nominal basis.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

alex_686
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Re: Dividend yield vs. 10 year gov't bond

Post by alex_686 » Fri Oct 06, 2017 8:53 am

Grt2bOutdoors wrote:
Fri Oct 06, 2017 8:29 am
IMO comparing dividend yields to nominal bonds is a classic mistake. Warren Buffett talks about dividends paying more, but he is referring to the earnings yield not dividend yield as is commonly assumed. Purchasing equity is a call option on future appreciation and a potential for higher yields over time, but it is all tied back to earnings.
I will second this with one caveat - the higher yields. We don't need higher yields to justify a lower dividend ratio. From the "dividend are irrelevance" school of thought, the US has a very generous attitude towards stock buy backs. Earnings are returning to investors via this path, not by dividends. This distorts the yield when comparing against various countries.

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Re: Dividend yield vs. 10 year gov't bond

Post by Grt2bOutdoors » Fri Oct 06, 2017 12:23 pm

alex_686 wrote:
Fri Oct 06, 2017 8:53 am
Grt2bOutdoors wrote:
Fri Oct 06, 2017 8:29 am
IMO comparing dividend yields to nominal bonds is a classic mistake. Warren Buffett talks about dividends paying more, but he is referring to the earnings yield not dividend yield as is commonly assumed. Purchasing equity is a call option on future appreciation and a potential for higher yields over time, but it is all tied back to earnings.
I will second this with one caveat - the higher yields. We don't need higher yields to justify a lower dividend ratio. From the "dividend are irrelevance" school of thought, the US has a very generous attitude towards stock buy backs. Earnings are returning to investors via this path, not by dividends. This distorts the yield when comparing against various countries.
Just to clarify, when I say potential for higher yields I mean the potential for higher earnings yield over time. As EPS climbs, your original purchase price remains the same. While capital appreciation could be anticipated, some equities remain undervalued for longer periods of time even as the earnings yield has increased.
"One should invest based on their need, ability and willingness to take risk - Larry Swedroe" Asking Portfolio Questions

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patrick013
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Re: Dividend yield vs. 10 year gov't bond

Post by patrick013 » Fri Oct 06, 2017 1:47 pm

When bond yields increase money will move from dividend stocks
to bonds and dividend stock prices may decline. But right now a
4% dividend yield, a total return higher than the market portfolio,
and much less volatility makes some dividend funds appealing.
age in bonds, buy-and-hold, 10 year business cycle

Dead Man Walking
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Re: Dividend yield vs. 10 year gov't bond

Post by Dead Man Walking » Fri Oct 06, 2017 2:17 pm

z3r0c00l wrote:
Fri Oct 06, 2017 8:04 am
Be sure to subtract the .5 - 1.5% Janus ERs from those dividends. A company more interested in selling new products than speaking frankly to customers about total return.
Curious, I checked out the Global Equity Income Fund. The 0.99% ER is only one of the fund's flaws. The fund holds 82 stocks and had a turnover rate over 105%. Lack of diversification and a lot of churning would scare off most Bogleheads.

I was not interested in the funds, but found the chart to be interesting. BTW, I'm not a dividend chaser. My international index funds probably hold all of the high dividend stocks, so I'm collecting the dividends.

DMW

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czeckers
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Re: Dividend yield vs. 10 year gov't bond

Post by czeckers » Fri Oct 06, 2017 2:31 pm

International equities have higher dividend yields because they are priced lower than US equities (as measured by PE ratio for example).

It's not just the dividend yield that makes international equities look attractive. I'm not saying sell everything and go all in on international, but it may be a good time to make sure you have some global diversification in your portfolio.
The Espresso portfolio: | | 16% LCV, 16% SCV, 16% EM, 8% Int'l Value, 8% Int'l Sm, 8% US REIT, 8% Int'l REIT, 20% Inter-term US Treas | | "A journey of a thousand miles begins with a single step."

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Artsdoctor
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Re: Dividend yield vs. 10 year gov't bond

Post by Artsdoctor » Fri Oct 06, 2017 5:47 pm

patrick013 wrote:
Fri Oct 06, 2017 1:47 pm
When bond yields increase money will move from dividend stocks
to bonds and dividend stock prices may decline. But right now a
4% dividend yield, a total return higher than the market portfolio,
and much less volatility makes some dividend funds appealing.
This is the mindset that worries me. I agree that many have invested in dividend stocks in lieu of bonds because rates have been so low. However, the big question I'd have pertaining to your statement is exactly when this "move" will occur. Bear markets can take many forms; sometimes there can be a dramatic drop and sometimes there can be a constant drip over extending periods of time. Either way, you sometimes don't really know how much trouble you're in until you're well into it. Dividend stocks can lose just as much as "non-dividend" stocks and those dividends will suddenly seem awfully paltry when your principal has lost a quarter (or more).

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patrick013
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Re: Dividend yield vs. 10 year gov't bond

Post by patrick013 » Fri Oct 06, 2017 6:13 pm

Artsdoctor wrote:
Fri Oct 06, 2017 5:47 pm
patrick013 wrote:
Fri Oct 06, 2017 1:47 pm
When bond yields increase money will move from dividend stocks
to bonds and dividend stock prices may decline. But right now a
4% dividend yield, a total return higher than the market portfolio,
and much less volatility makes some dividend funds appealing.
This is the mindset that worries me. I agree that many have invested in dividend stocks in lieu of bonds because rates have been so low. However, the big question I'd have pertaining to your statement is exactly when this "move" will occur. Bear markets can take many forms; sometimes there can be a dramatic drop and sometimes there can be a constant drip over extending periods of time. Either way, you sometimes don't really know how much trouble you're in until you're well into it. Dividend stocks can lose just as much as "non-dividend" stocks and those dividends will suddenly seem awfully paltry when your principal has lost a quarter (or more).
It's just a potentiality. Higher bond returns with less risk would attract investors
from equity income funds if interest yield exceeds dividend yield. Some appeal
of dividend stocks is that they still provide equity exposure and the attached risk
low beta or not. Big bear market tomorrow ? Sure could be, I agree.
age in bonds, buy-and-hold, 10 year business cycle

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