UPDATE 2-Benchmark US govt yield overtakes S&P 500 dividend as pandemic risks subside
(Updates yields, adds comment)
By Stephen Culp
NEW YORK, Feb 25 (Reuters) - The advantage that the S&P 500 dividend yield has held over the benchmark U.S. Treasury note during the pandemic has been erased, a year after the collapse in interest rates set the stage for Wall Street's resurgence in the wake of the coronavirus sell-off.
The U.S. 10-year Treasury yield on Thursday rose above the estimated 1.48% S&P 500 dividend yield, reaching as high as 1.614% before paring. It was last at 1.5026%.
The benchmark yield was last above the 1.5% level in February 2020, before the global health crisis brought markets to their knees. Since then, the stock market has had a remarkable run, sending the major U.S. indexes to multiple all-time highs.
But the move higher in Treasury yields could make stocks look relatively less attractive compared to safer Treasuries. Indeed, U.S. equity indexes sold off sharply on Thursday as the benchmark yield advanced.
"We’ve seen the 10-year Treasury yield go from below 1% to 1.5% pretty quickly," said Peter Tuz, president of Chase Investment Counsel in Charlottesville, Virginia. "All of a sudden it’s competitive with stocks."
Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, agreed.
"The market has done great, but this has changed the risk-reward," he said. "Treasury bonds are seen as a safer investment. All stocks have risk, even dividend payers."
Silverblatt calculated the S&P dividend based on Wednesday's closing S&P 500 level. Refinitiv Datastream calculated the dividend at 1.45%.
Silverblatt noted that companies will be paying more money in interest, although less than before the coronavirus rocked financial markets. "There is a lot more debt out there now, companies have bulked up because they were worried about cash and issued shares and debt, we see that in all the statistics, and eventually it catches up with you."
Treasury yields tumbled in February 2020 as the COVID-19 pandemic shocked global financial markets and crippled much of the world's economy. Simultaneously, falling stock prices created a spike in the S&P 500 dividend yield, even as many companies suspended payouts to shareholders.
The S&P 500 dividend yield reached 2.76% in late March, a historically large premium over the 10-year Treasury yield of 0.76% at that time, according to Refinitiv Datastream.
Since then, companies have largely resumed their dividends, with many even increasing their shareholder payouts.
(Reporting by Stephen Culp, Noel Randewich; Editing by Alden Bentley, Alexandra Hudson)
