The Diary of Different Yields

• For stocks, earnings yield (E/P ratio inverse) is compared to 10-year Treasury rates for valuation, while dividend yield and SEC yield (which nets dividends against fund fees) are used to assess income potential
• Bond evaluation differs by strategy: ETF portfolios use SEC yield to forecast income generation, while individual bond portfolios analyze yield-to-maturity, yield-to-call, and yield-to-worst based on bond characteristics
• Municipal bonds require taxable-equivalent yield calculations to compare properly with taxable bonds; a 3.25% municipal yield equals 5.16% for investors in the 37% tax bracket, making it superior to a 4.70% Treasury despite lower stated yield

Market Summary: Understanding Different Yield Metrics for Stocks and Bonds

Key Points:

RiverFront Investment Group provides a comprehensive guide to evaluating various yield metrics for stocks and bonds, highlighting that different yields measure distinct investment characteristics crucial for portfolio allocation decisions.

Stock Yields:

• Historical data shows approximately 40% of U.S. stocks' long-term total returns come from compounded dividends
• Earnings Yield (E/P): The inverse of the P/E ratio, compared against the 10-year Treasury to assess stock-bond valuations
• Dividend Yield: Calculated by dividing annual dividends per share by current stock price, used for income-focused investments
• SEC Yield: For ETFs, nets dividends and fund fees over 30 days to forecast next year's income potential

Bond Yields:

For ETF-based portfolios, managers focus on SEC yield, which calculates 30-day interest payments minus expenses to project annual income generation.

For individual bond portfolios with larger minimums, three metrics apply:

• Yield to Maturity (YTM): Used for non-callable bonds, assuming reinvestment at same yield until maturity
• Yield to Call (YTC): Applied to callable bonds, calculated to first available call date
• Yield to Worst (YTW): Uses lowest call price and associated date for worst-case scenario analysis

Market Context:

Following the 2008 Global Financial Crisis, yields had minimal relevance due to Fed's zero interest rate policy and growth stock dominance. Currently, rising bond yields have increased their competitiveness versus stocks, making yield analysis essential for balanced portfolio allocations.

Municipal Bonds: Tax-equivalent yield calculations are critical; example shows 3.25% municipal yield equals 5.16% taxable-equivalent for the 37% tax bracket, exceeding the 4.70% 10-year Treasury.