before my time

I began my stock market career in 1978.  I changed jobs in 1984, taking on stock markets in developing countries in the Pacific for the first time as part of my new duties.

One of the more striking features of these emerging markets was that the dividend yield on stocks was almost always higher than the coupon on the country’s government bonds.

Weird.

How so?

At that time in these countries (and by and large still today), there were no large pension funds (because there were no pensions for workers) or other institutional stock market investors.  Making maybe $100 – $200 a month, workers were lucky to have savings accounts–and had absolutely no interest in equities. As a result, stock market investing was the province of ultra-wealthy individuals.  Because they were older and very affluent, they tended to be really risk averse.  They were interested in income, not growth.  They regarded stocks as a risky kind of bond.  So it was only natural for them to demand a higher yield as compensation for taking on the extra risk.

As you might imagine, this attitude had a strong influence on what kind of company could go, and remain, public.  These markets were/are chock full of mature firms with limited growth prospects but which generate large and stable free cash flow.

What has this to do with the US?

After the market crash in 1929 through much of the 1950s, in the US stock market, the dividend yield on stocks exceeded the coupon on long-dated government bonds. To me, reading the data long after the fact, the US stock market then looks a lot like the emerging markets I encountered in the 1980s.  Very different from today’s S&P.

On Monday, the inflationary 1970s.