Buying stocks like 'picking up dimes in front of a freight train,' manager says

Holding all of the stocks in the S&P 500 is expected to grant investors a greater return, purely in terms of yield, than holding the 10-year Treasury bond, a somewhat unusual condition that has tended to coincide with impressive returns for equities.

Current analyst expectations are for the S&P 500 stocks to collectively return 2.28 percent in dividends over the next year, somewhat higher than the 2.1 percent yield seen over the past year. This compares to a 10-year yield of 1.47 percent, which is considerably lower than it was before the U.K. voted to leave the European Union.

Going back to 2000, there have only been three sustained periods in which the dividend yield remained about the 10-year yield, and all of them coincided with impressive returns for stocks.

Read MoreDespite volatility, it pays more to hold stocks than bonds

More generally, the S&P 500 has risen an average of 0.4 percent in weeks after one in which the S&P's expected dividend yield finished above the 10-year yield, over all the weeks going back to 2000. That compares to an average loss of 0.002 percent in the much more frequent weeks in which the 10-year yield recently closed above the expected dividend yield.

This 0.4 percent disparity might not sound like a giant difference, but it does suggest that stocks may be somewhat more attractive when yields on Treasurys are especially low.

From a theoretical perspective, modern investors would generally expect the 10-year yield to be greater than the dividend yield. For those who buy a bond and hold it, the bond yield is the only return that can be achieved. Meanwhile, holders of stocks generally expect the lions' share of their returns to come from capital appreciation. After all, stocks have tended to rise over time.

For those who believe that stocks are set to sink in the near future, however, the comparison between dividend yields and bond yields makes for a poor bull case

"This is the worst possible indicator at this point in time," said Chad Morganlander, portfolio manager at Stifel Nicolaus. "Interest rates are the lowest they've been since the time of Babylon, so using the yield on a 10 year or whatever you want to justify valuations is not prudent."

"What you want to do," Morganlander continued Tuesday on CNBC's "Trading Nation," "is focus your attention on price-to-earnings multiples, operating margins, revenue growth, and watch what global growth is doing."

Seen in that framework, stocks are richly valued even as global growth is poor.

For that reason, "to justify a dividend yield 100 basis points higher than a 10 year is just imprudent. That's like picking up dimes in front of a freight train."


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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's “Closing Bell (M-F, 3PM-5PM ET).   In addition, he contributes to CNBCand CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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