Due to today’s very low interest rates, the traditional advantage of bonds for income has evaporated. … Simply put, the dividend yield on the S&P 500 index is now higher than the interest yield (technically, the yield to maturity) on 10-year U.S. Treasury bonds, even though stocks additionally offer the likelihood of economic growth gains and inflation-induced price gains, while bonds do not. … A typical 10-year U.S. Treasury bond was recently priced to provide a 1.53% annual yield to maturity. Unless such a bond is held in a tax-deferred account, the interest is typically taxable each year at the federal level as ordinary income. Assuming a 24% tax bracket for [a] bond’s owner, the 1.53% becomes about 1.16% annually after tax. U.S. inflation has been running at about 2% per year, so 1.16% after tax becomes a negative 0.84% annually after both tax and inflation. Moreover, even if the bond holder paid no income taxes on bond interest, the after-inflation return would still be negative. So why would anyone buy U.S. bonds?
Sep 2019