In the history of yield-seeking investments, 1959 was a seminal year — the one in which bond yields and dividend yields flipped. The question investors must now contend with is whether they have finally flipped back.
It may not be one of those years that has widespread recognition among armchair market historians, such as 1929 or 1999, but 1959 was a critical one nonetheless. Before 1959, dividend yields on stocks were reliably above those of bonds. This made all the sense in the world insofar as stocks were seen as a riskier way to generate income; since they don't come with the legal obligations that adhered to bond payments, dividend yields had to be higher as compensation for risk.
This is the simple explanation for the fact that whenever dividend yields slid to approach bond yields, as they did in 1898 and 1929, stock prices fell or bond prices rose such that the relationship between the one type of yield and the other was maintained.
It is no surprise, then, that when dividend yields approached bond yields again and actually rose above them in 1959, the old Wall Street hands had a clear prediction of what would happen.
As Peter Bernstein tells it in his classic book "Against the Gods: The Remarkable Story of Risk":
my partners, veterans of the Great Crash, kept assuring me that the seeming trend was nothing but an aberration. They promised me that matters would revert to normal in just a few months, that stock prices would fall and bond prices would rally.
I am still waiting. The fact that something so unthinkable could occur has had a lasting impact on my view of life and on investing in particular. It continues to color my attitude toward the future and has left me skeptical about the wisdom of extrapolating from the past.
That is to say, instead of reversing, bond yields rose dramatically above dividend yields — and by 1982, the 10-year Treasury yield was nearly 9 percent higher than the S&P's dividend payout. In hindsight, 1959 marked an epic sea change, as the below chart (which uses data from Yale's Robert Shiller) shows: