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Article Excerpt
Like a soup menu at a New York deli, investors have a choice where to invest their hard-earned money. The four major menu choices are the bank, real estate, bonds or stocks.
There are many concoctions of those four groups, but those are the four big soup pots. Of the four, the only two with upside potential and daily liquidity are the stock pot and the bond pot. And there is endless debate on which pot tastes better and whether those pots are too hot, too cold or just right.
A great way to compare which of the two soups should be more satisfying to the wallet is to compare the yield of the 10-year Treasury bond to the earnings "yield" of the stock market.
A 10-year Treasury bond is like fast food in that you know exactly what you will get. As of this writing, a $10,000 investment will pay you $433 per year and give you $10,000 back in 10 years, which is a yield going forward of 4.33 percent.
Investing in stocks is more like a bowl of jambalaya in that every spoonful is different. Also, like trying to figure out the ingredients in the jambalaya, the earnings "yield" of stocks is not readily available.
To figure the forward earnings "yield," take next year's earnings estimate for the S&P 500 and divide it by today's index price. The Thomson First Call estimate for earnings for the S&P 500 for next year is $73. The index today is at 1185. Divide 73 by 1185 and that puts the earnings yield at 6.16 percent.
So a Treasury bond yield is just north of 4 percent, and the stock market's "yield" is just over 6 percent. Stocks, at plus-2 percent by this back-of-the-napkin calculation, are a better buy.
"But," say you Doubting Thomases, "you are comparing potatoes to peppers. Stocks should yield more because they are unpredictable and risky."
Maybe. What is amazing is that over...
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