Earnings Yield vs 10-Year Treasury
I've been looking at the earnings yields of the stocks under my coverage and as I watch them compress against the 10yr Treasury, I'm struggling to come up with the math to explain why the risk is worth taking. If my NTM E/P is 5% and the 10yr is at 4.5%, then the argument would be I'm getting 50bps of incremental return for the risk; however, this is incomplete because it's not taking into account growth. What is the appropriate way to account for it?
Also, my companies have a high dividend payout ratio (~70%), which makes me feel like maybe the more appropriate way to evaluate this relationship would be to look at the dividend payout ratio vs the 10yr, then add in the dividend growth rate, plus the expected annualized capital appreciation. There may be issues with this as well since it feels like I'm double counting the growth of both the E and P in that scenario, but at least by using the dividend and capital appreciation we're getting to a truer sense of the return the investor might receive above the risk-free rate.
Thanks for any help!
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