Investing

94% of the time when this happens, stocks are a winning bet over bonds

Key Points
  • "Stocks are a 'no brainer' vs. bonds," Bank of America Merrill Lynch says.
  • In August, the dividend yield for the S&P 500 surpassed the yield on a 10-year Treasury for the first time since 2016.
  • "Historically, 94% of the instances in which this has happened in the past, stocks have outperformed bonds over the next 12 months," Bank of America says.
A trader works in S&P 500 stock index options pit at the Chicago Board Options Exchange (CBOE) in Chicago, Illinois.
Jim Young | Bloomberg | Getty Images

A rare phenomenon with a great track record is taking place in the market and it shows that U.S. stocks offer much more value than bonds.

In August, the dividend yield for the S&P 500 index, at 1.89%, surpassed the yield of a 10-year Treasury, at 1.5%, for the first time since 2016. According to Bank of America, stocks have significantly outperformed bonds 94% of the time 12 months out after this has happened.

And it's not even close, with stocks topping bonds by 23 percentage points over that time period, Bank of America notes.

"Stocks are a 'no brainer' vs. bonds," Bank of America analyst Savita Subramanian wrote to investors on Monday about the phenomenon.

The dividend yield on the S&P 500 on Monday stood at 1.8%, still above the 1.73% yield on the 10-year. Investors get a higher return with stocks than bonds from dividends alone, not to mention the potential for upside from the price. Historically this has been a great time to own stocks.

Typical wisdom has investors make use of a "60/40" portfolio, which allocates 60% of investment to stocks and 40% to bonds. Subramanian said investors should rethink this strategy at times like these when stocks offer so much more value.

Still investors may be afraid to buy stocks with trade war headlines holding back the S&P 500, which has been in a bull market for the last 10 years. The S&P 500 is trading just 2% higher over the last six months.

"Stocks still look cheap on growth and cash flow" as well, Subramanian added.

– CNBC's Michael Bloom contributed to this report.

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