Before you lie two doors, and behind each lies a prize. Behind door No. 1 is a promise from the U.S. government to give you $1.90 each year for the next 10 years. Behind door No. 2 is a vague commitment from America's biggest companies to give you $2.25 in the next year, more the year after that, more the year after that and so on.
Oh, and if you pick door No. 2, you also get a set of tiny pieces of America's biggest companies — a bonus prize that has tended to increase in value by 7 percent every year.
Which door will you choose?
While the best decision will obviously depend on the investor's market expectations and financial circumstances, choosing door two — stocks — has actually gotten a bit easier lately.
In the modern era, the 10-year Treasury yield has generally been higher than the S&P's dividend yield. The rationale is that stocks offered the possibility, if not the outright expectation, of capital appreciation, while bonds hold no such opportunity if held to maturity.
For instance, 15 years ago, the dividend yield granted by the S&P 500 over the prior 12 months was 1.4 percent, with about 1.5 percent expected over the following 12 months. This as the 10-year Treasury yield sat a touch below 5 percent.
On Monday, the 10-year yield was below 1.9 percent, while the S&P 500 dividend yield over the past 12 months has been 2.1 percent, with about 2.3 percent expected over the next year.
This is mostly a story of the plunge in Treasury yields, which has come as dividend payouts have crept higher. Still, it is striking to see the S&P's dividend yield outpace Treasury rates.