Liz Looks at: Yields Racing Lower
The Highest Low
At the end of July, the dividend yield on the S&P 500 sat at 1.33%, its lowest level since 2001. The US 10-year Treasury yield closed at 1.17% on August 4th, lower than the levels seen after the Global Financial Crisis of 2008/2009. To revisit a concept from my last column about how investors should consider three objectives—preservation, income, and growth—when building a portfolio: those who are prioritizing income right now are left with a set of uninspiring options.
It’s All Relative
Investing success is frequently gauged by performance relative to a benchmark or an alternate option. If we put these yield readings in the context of “what’s the other option?,” we come away with perhaps a bit more inspiration.
As far as equities go, the S&P 500 may only be offering a 1.33% dividend yield, but since the market bottom on March 23, 2020, the index has kicked out a price return of 97%. The tech-heavy Nasdaq had a stronger price return at 115% over that same period, but its dividend yield is less than half that of the S&P 500 at 0.64%. The small-cap Russell 2000 Index offered a price return of 119% for the period, and has a current dividend yield of 1.11%.
In other words, even at 1.17%, the 10-year Treasury offers a higher yield than small-cap stocks with arguably much less risk.
Additionally, the Nasdaq has produced more price return than the S&P, but leaves much to be desired as far as income is concerned, compared to the S&P, the 10-year Treasury, and the Russell 2000.
The five largest names in the Nasdaq and the S&P are exactly the same. If you’re searching for exposure to those “big cap tech” names, you can get it in the S&P just as well as in the Nasdaq.
Bottom line: if an investor is focused on income, the S&P 500 wins compared to these options. If they are focused on growth potential, the S&P 500 still looks pretty attractive on a risk-adjusted basis compared to the other equity options.
Relatively speaking, a 1.33% dividend yield on the S&P 500 isn’t that bad.
But Where Does It Go From Here?
The long-term average dividend yield is roughly 1.99%, which may sound quite attractive at the moment. And if you believe that measures eventually revert closer to their long-term averages, you might expect it to rise from here and be excited by the prospect. However, one of the ways the dividend yield can rise is by a fall in the index (dividend yield = dividends / index level).
That’s not a great alternative. It helps to look at results on a “total return” basis (price return + income). Income is at historic lows, but price return has more than pulled its weight since last March. Let’s be careful what we wish for even if we’re income investors. I’d rather have dividend yields at this historically low level than experience a material drop in the index.
-Liz Young, Head of Investment Strategy at SoFi
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Communication of SoFi Wealth LLC an SEC Registered Investment Adviser. Information about SoFi Wealth’s advisory operations, services, and fees is set forth in SoFi Wealth’s current Form ADV Part 2 (Brochure), a copy of which is available upon request and at www.adviserinfo.sec.gov. Liz Young is a Registered Representative of SoFi Securities and Investment Advisor Representative of SoFi Wealth. Her ADV 2B is available at www.sofi.com/legal/adv.