With Treasury yields soaring, dividends aren't paying. Well, not paying like they used to. The S&P 500 dividend yield is lagging the 10-year Treasury yield by the most since 2007. That's bad news for dividend-paying stocks.
The S&P 500 dividend yield was 1.59% as of Sept. 30, up 5 basis points from the end of the second quarter. But the 10-year Treasury yield surged 75 basis points over the third quarter to 4.57%. That gap of 2.98 percentage points is the widest on a quarterly basis since Q2 2007. The Spider S&P 500 ETF Trust is down about 8% since the end of July.
On Oct. 2, the gap widened to 3.09 percentage points, as the 10-year yield rose to 4.68%, hitting a 16-year high intraday. The 10-year Treasury yield was moving above 4.7% early Tuesday.
As recently as the end of 2021, the gap was just 14 basis points.
S&P 500 Dividend Yield Lags 10-Year Treasury Yield
Dividend-Paying Stocks Struggle
Utilities and REITs, which traditionally offer large payouts, have struggled this year as investors switch from dividend-paying stocks to Treasuries and other bonds.
The Dow Jones utility average has fallen 20.1% in 2023 through Oct. 2 to a three-year low, including a 4.7% tumble on Oct. 2 after last week's 6.3% skid. The Finance-Property REIT industry group is down 10.1% through Oct. 2, hitting a three-year low. The Finance-Mortgage REIT group retreated 14.4%.
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Treasury Trends Aren't Going Away
Treasury yields have shot up since the March 2020 Covid low and especially since the end of 2021.
Yes, the Fed raised rates aggressively to fight soaring inflation. But Fed rate hikes are over or nearly so with inflation coming down.
More broadly, the era of near-zero Fed rates, going back to the Great Recession, has finally ended. During much of that 2008-2022 span, the Fed also was buying Treasuries and mortgage securities to curb long-term interest rates. Now, the Fed is unloading Treasuries and mortgage securities amassed during the pandemic.
Meanwhile, Treasury issuance is booming in the era of trillion-dollar deficits even in decent economic conditions. The fiscal picture is expected to deteriorate significantly in coming years due to booming entitlement spending. There is little appetite for significant spending cuts or tax hikes to bring America's fiscal house in order.
There's a bit of a vicious circle developing. Surging deficits are helping to push up Treasury yields. That will greatly increase debt interest payments over the next several years, which in turn will be a tailwind for higher yields.
All of that suggests the S&P 500 dividend yield may pale compared to Treasury yields for an extended period.
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