Equity Yield of NIFTY (NIFTY 50)

vs.
Bond Yield (10 Yr. Govt Bond)
CFM GROUP 4
A B H I S H E K | A R N AW | A R U N | R A J I V | R U PA M

Equity: Dividend Yield vs.

Earning Yield
Definitions:
Dividend Yield

Earning Yield

It is a way to measure how much

theinvestors earned for each dollar
invested in anequity

It is a way to measure how much the company

earned for each dollar invested in anequity

Annual Dividend expressed as a percentage

of the current Share Price

Annual Earnings per Share (EPS) expressed as a

percentage of the current Share Price

Equity: Dividend Yield vs.

Earning Yield
Analysis: using daily data points from
Jan13 to Aug16
Range

Dividend
Yield

1.21% ~
1.62%

Mean
1.40

Coeff of
Var

Dividend Yield vs. Earning Yield

7

0.075

Earning
4.15% ~
5.00
0.121
o
Observation:
Dividend
Yield
is much
Yield
6.57%

lower and less fluctuating compared to

Earning Yield

o India is an emerging economy and

companies are retaining a major portion of
their earnings to reinvest
o Stocks are Overvalued

o Henceforth, Earning Yield is used for

Time-Series Analysis

5
4
Dividend/earning Yield %

3
2
1
0

Dividend Yield

Earning Yield

Equity Yield vs. Bond Yield

There are Two Ways of comparing Equity Yield and Bond Yield
o BEER (Bond Equity Earnings Yield Ratio): A metric used to evaluate the
relationship between Bond Yield and Earnings Yield
o BEER has two parts the numerator is represented by a benchmark bond yield while the
denominator is the current earnings yield of a stock benchmark.
o Normally analysts feel that a BEER ratio greater than 1 imply that equity market is overvalued,
while number less than 1 means it is undervalued.

o YIELD GAP:The difference between average Dividend Yield and average Bond Yield
o Assesses the value of stocks using bond yields to indicate whether equity markets are
overvalued or undervalued compared to government bonds.

o Henceforth, we will use BEER for Time-Series analysis as we are using Earning
Yield

Equity Earning Yield vs. Bond

Yield
Analysis: using daily data points from Jan13 to
Aug16
o Earning Yield is consistently lower than Bond Yield
o BEER (Bond Equity Earnings Yield Ratio) ratio is
between 1.26 ~ 1.88 during Jan13 to Aug16,
which indicates that equities were overvalued as
compared to bonds
o Even though equities are more riskier than bonds,
the yield on equities is lesser than the yield on
bonds
o If BEER is above normal level, the assumption is
that the price of equity will decrease thus lowering
the BEER
o When BEER is decreasing, then investors should
invest in Equity and vice-versa

Bond Equity Earnings Yield Ratio

1.9

20.00
18.00

1.7

1.5

16.00
14.00
12.00

1.3
Bond Equity Earnings Yield Ratio

10.00
8.00

1.1

0.9
0.9

bond / earning yield %

6.00
4.00
2.00
2.00

0.7
0.7

BEER
BEER Ratio
Ratio

Earning
Earning Yield
Yield

0.00
0.00

Bond
Bond Yield
Yield

Factors affecting Bond Yields

1. Interest Rates: Changes in interest rates affect
bond prices by influencing the discount rate.
Inflation produces higher interest rates, which in
turn requires a higher discount rate, thereby
decreasing a bond's price .Meanwhile, falling
interest rates cause bond yields to also fall,
thereby increasing a bond's price. New bonds
paying higher interest rates mean existing bonds
with lower rates are less valuable. Prices of existing
bonds fall.
2. Foreign Bond Yields:The average bond yield on
10-year government bonds was 8.04 % between
Jan 2013 and Aug 2016. This is much higher than
the yields on 10-year bonds of the US (2.25%),
Germany (1.02%), Britain (2.11%),and Japan
(0.45%). There is a class of investors which chases
yields.

Factors affecting Bond Yields

3. Credit Risk: Governments have credit ratings just
as consumers do. If major ratings services such as
Moodys, Fitchs and Standard & Poors downgrade
a bond issuers credit rating, demand for the
bonds tends to fall. Prices drop and yields rise.
Eventually yields rise enough to attract investors
willing to accept greater risk in exchange for the
higher yields.
4. Inflation:Rising prices over time reduce the
purchasing power of each interest payment a bond
makes. Lets say a five-year bond pays Rs300
every six months. Inflation means that Rs300 will
buy less ten years from now. When investors worry
that a bonds yield wont keep up with the rising
costs of inflation, the price of the bond drops
because there is less investor demand for it.

Current Scenario

Thank You!