I recently read an intriguing article on Interactive Investor about the relative price of stocks in various countries around the world, compared to government bond yields. Now, whilst we love dividend growth investing and value stocks here at There’s Value, there are other places to put your money. Savings in your NISA (tax-free) or other types of accounts are just one option. P2P lending is another one, with which we have been successful over the last 9 years (gosh, has it really been THAT long?!). We use a bit of everything, and have recently started to concentrate more on dividend growth and value investing.
We have also got exposure to gilts (UK government bonds) through M’s SIPP (pension) and baby’s Junior SIPP and stock and shares JISA (tax-free junior investment account). I like gilts, because they’re basically rock solid. There is almost no chance of default. You can even buy index-linked gilts, to avoid the perils of inflation eating away at your stash. But the question when buying stocks is, is this type of investment is good value right now, when compared to gilts?
According to the article, stocks are pretty cheap right now in Switzerland, France, Germany, and Japan, when compared to 10 Year government bonds:
As you can also see from the chart, UK stocks are roughly in the middle, perhaps slightly under, and US stocks are expensive.
However, in all the countries shown in the chart, all the dividend yields are above the bond yields, even in the USA, where the bond yield is close to the dividend yield, dividends still prove to be the winner. Even if the bond yield is close, it’s always better to get dividends in each of these countries.
Of course, there is more detail to be had than just what’s available in the chart. The article also quotes Citi as stating:
“UK equities have never been cheaper in the last c100 years relative to UK gilt yields, surpassing previous valuation extremes in 1940, 2008 and 2012,”.
That seems pretty good to me. Of course, this doesn’t mean that stocks are cheap, just relatively cheap to a particular type of safe investment. There are other ways to look at whether stocks are cheap or not, and that is to look at things like the PE ratio, the average dividend yield in and of itself, price-to-book ratio, etcetera, in which case you might look at UK stocks and think they’re pretty average based on these ratios.
Robert Shiller’s CAPE Ratio
Robert Shiller gave a talk the other day. He was pointing out that US stocks are fairly expensive and European stocks quite cheap. Now, he did not use the dividend yield compared to 10 year government bond yield, instead, his measure to discover this was his very own CAPE ratio – cyclically adjusted price to earnings ratio. You are probably familiar with the PE ratio, but the CAPE ratio is basically just an average of the last ten years of earnings, rather than just the current PE (which is meant to be the last 12 months’ worth of earnings). This gives you an idea of the smoother rate of earnings for a company, rather than just where they are right now, or have been over the last year. The CAPE is usually applied to an entire market, but Benjamin Graham (the Daddy of value investing, and tutor to Warren Buffet) also spoke of averaging the earnings of stocks.
However, we want to maximise our money’s potential to grow and provide for us over the long term, so we need to balance the risks and rewards of where we want to invest our money today. A ten year measure is going to be slow to react to large factors causing changing markets. Also, diversification is important, but do we really need to split our money up into several small pots? Or can we get by with a small amount in gilts (or some kind of cash emergency fund) and the rest nicely diversified throughout the stockmarket at large?
What do you think, are stocks a great bargain right now? Do you own gilts? What do you think about diversification? Let me know, leave a comment below.
photo credit: bplanet/freedigitalphotos.net
I agree with DivHut, there is value stock out there(oil and metal). Yet there is uncertainly and instability in the world that could collapse. At least from the media, ISIS and boco haram kidnapping and such. If the USD got strong then weep see weak goal. If there is a big war break out, we will see strong USD, gold and commodity, initial drop in stock. But we don’t know when it hit the bottom, so the best strategy now, will just buy dividend stock, average up/ down. Having too much cash, the inflation will eat through it.
I think you’re right. Inflation is a killer, so perhaps it’s better to be in a stock, a strong one like JNJ or something like that from David Fish’s lists. Even if the price gets shoved if there’s another crash, it’s unlikely that JNJ are going to fall over as a company.
Interesting article! According to the Buffet indicator the market is expensive: indicator Who is to say? When interest rates remain low for 5 or 10 dividend stocks remain one of the safest places for yield. But what can you do when you feel the market is expensive? Waiting for a dip? Might be a couple of years… While nobody knows I am going to build up my cash position a bit more this year!
Take care!
RN
RN recently posted…What stocks to buy according to Piketty?
Hey RN, thanks for visiting. I am able to find more value in the UK market right now, but the USA is quite expensive, especially with the strong dollar at present. I think building up a cash position is sensible, if you can’t find any bargains. But there are plenty of bargains in the Eurozone right now I think.
Cheers
Very interesting chart! I hadn’t seen it laid out like that before. It makes it very easy to understand. I agree with US stocks being expensive, I have had some difficult finding value in more than a few sectors (oil, materials, for example). Maybe I just need to look more at foreign companies that trade with ADRs in the US.
Take care!
ILG, thanks for stopping by. Yes, the chart makes it so easy to understand, doesn’t it? I know it’s only one measure out of many that you coulf compare, but I think it’s a pretty decent one.
You could do worse than to look at Switzerland right now. How about Nestle?!
Cheers
M,
Interesting article! Even though stocks are cheap when compared to government bonds of stable countries, I don’t think they’re actually cheap.
With the recent drop in the Euro, most foreign stocks have become increasingly expensive for me, so that’s why I’ll mostly be focussing on Euro countries for the time being – and Switzerland. You should stock up on cheap Euro stocks! There are a lot of dividend growers out there in Europe that are quite decently priced.
Cheers,
NMW
Hey NMW,
Yes of course, stocks are not necessarily cheap just because they’re cheap compared to gilts. I’m looking at Euro stocks right now, since it’s just so pummelled recently! There’s just one problem, the withholding tax. Only Finland out of the European countries doesn’t tax my dividends, whereas the other countries will tax me typically 15% – in the UK it’s only 10%. I know this is nothing compared to the pathetic situation you Belgians are forced to endure, but I’d rather not pay any tax at all, if I can legally and morally avoid it!
Are you looking at any stocks in particular? I would probably invest in German stocks actually, since I know the country and some of the major companies. I’ve always been fond of BMW, they’re great cars… although that is not a reason to invest in and of iself!
Cheers
M,
The withholding tax definitely is a bummer, but I just look at it as if the yield is lower. Taxes are something we can’t avoid, so no reason to worry too much about them. If you wish to invest in German stocks, you’ll take on the highest withholding tax of ‘em all if I’m not mistaken (26.75%), so be mindful of that.
Currently I’m waiting for a good opportunity to jump into Essilor, Fresenius, BMW, Sofina, Munich RE, Groupe Bruxelles Lambert, LVMH, Bayer, Siemens, BASF, Inbev, L’Oreal, Air Liquide, Ahold, Enegas, UCB, Danone, etc.
I’ll be posting an article on Euro dividend stocks pretty soon, so be on the lookout.
Have a great weekend,
PS: I was so confused by your genders for a while, but I finally got it!
No More Waffles recently posted…Are You like a Fish out of Water?
Hey NMW,
Looks like we’ve got a lot in common in that stock list. I like Fresenius, BMW, Munich Re, Siemens, and BASF :). I’m looking forward to your article!
Such a shame about the tax, but as you say, it’s like getting a reduced yield. However, there is a double taxation treaty with Germany, so there is the possibility to reclaim some of the tax (sadly not all of it)
Cheers!
I think there is still a lot of value among many stocks just in specific sectors. While many consumer staple names are exceedingly expensive there is still a lot of value in oil, iron, copper and large Canadian bank stocks just to name a few. Stocks in all those sectors have dropped tremendously in the last year and continue to offer increasingly attractive yields at fair or below fair value. So yes, there are some cheap stocks out there.
DivHut recently posted…Keep Your Goals And Resolutions
DH, thanks for popping over. I agree with you, for Canadian stocks definitely, but perhaps it’s also something to do with the CAD having gone down so much recently? Your market is looking ever more attractive. I like the old, traditional banks you’ve got there especially!
Cheers
M,
I like the collection of different approaches to valuing the market you put together. Dividends seem to be more attractive than bond yields currently, but who knows how long that will last. The central banks seem to surprise on a weekly basis these days.
Again, I would argue that we are best of by picking individual stocks of businesses we understand and value. The current market highs are created by a couple of high rising stocks; take Apple’s jump yesterday/today for instance. That means that there are others that hover around low levels. Stocks of both camps might be attractive. I believe there are a lot of good deals out there currently.
I wish you the best of luck with your investments.
Good to see your site being that active!
Interesting charts there, M. It is hard to find value in the US stocks these days. And the yields/interest rates are so low, investors have been driven to take on more risk.
I find that there is more value to be found here at home in Canada. EU stocks are something that I am also looking at. Theres some great companies that I would love to add to my portfolio. For tax purposes, I am looking exclusively at ADRs (since I can only trade on North American exchanges) based in UK. That way, I dont pay anything in dividend withholding taxes
Thanks for sharing and the writeup. Definitely worth a second look to see where things stand compared to other countries.
R2R
Roadmap2Retire recently posted…Canadian National Dividend Increase
Hey R2R thanks for popping over.
I love not getting charged withholding taxes
Europe is so cheap right now, but I guess maybe the best way to access it without the tax issues, is to get some kind of tracker or ETF?
Cheers!