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How investors compare equity and bond yields after the zero-rate era

ETF Trends highlights that differences in yield metrics, including SEC yields and bond yield-to-worst measures, can change how income potential is evaluated when allocating between stocks and bonds.

Reported · Written up by our desk · Fund Industry

ETF Trends outlines how the role of “yields” in portfolio construction has shifted since the 2008 financial crisis, when balanced investors focused less on income because bond yields were held low by the Federal Reserve’s near-zero interest rate policy. In the current environment, with bond yields no longer pinned near zero, the publication argues stocks face more competition for investor allocations, making it more important to understand how different yield measures work when comparing securities.

The outlet says comparing yields can be confusing because the metrics are not all measuring the same thing. It references an SEC yield approach that nets dividend and interest income against fund fees for a one-year income view, and it also notes that bonds are evaluated using yield-to-maturity, yield-to-call, or yield-to-worst frameworks depending on the bond type.

ETF Trends further explains that for equities, it examines earnings yield and dividend yield, including earnings yield based on E/P for a stock or equity index such as the S&P 500. It adds that one cited study from NDR suggests nearly 40% of US stocks’ long-term total return has historically come from the compounding of dividends, and the piece says the firm uses total return thinking when estimating long-term expected returns for stocks and bonds.

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