Moving the Market -- Tracking the Numbers / Street Sleuth: Market Anomaly May Lead to Profit; Investors Can Make Money If Stock Dividends Carry Higher Yields Than Bonds
WHEN STOCKS FROM otherwise healthy companies pay out more than their bond brethren, at least in terms of certain ratios, investors can benefit from that rare lapse in logic.</br></br>At issue are companies whose stock dividends carry higher yields than the same companies' bonds. An investor who buys those stocks and shorts the bonds stands to make a quick profit. Such a strategy played in 2004 would have returned 10% versus a 9% return by the S&P 500, according to Goldman Sachs.</br></br>"It's an inefficiency, because the market values different securities of the same issuer in a way that doesn't make sense from an economic perspective," says David Kostin, a Goldman portfolio strategist. "An asset with higher growth potential theoretically should offer less current yield than a similar asset with lower growth potential."</br></br>And that's usually how it works. The growth of a stock dividend is expressed as a percentage yield gleaned by dividing the annual dividend payment by the stock's current market price. Companies that can afford to pay dividends on their stocks tend to see their stock prices rise over time, and the rising share price lowers the dividend yield unless the dividend payment rises dramatically.</br></br>But 15 companies identified by Mr. Kostin and a colleague, Robert Koyfman, in a report earlier this month have average dividend yields of 3.8%, while their bond yields, adjusted for inflation, average 2.4%.