The Investment Yield Spectrum

Abstract

Traditionally, average dividend yields on ordinary shares were higher than yields on gilt-edged securities. This ‘yield gap’ — measured as the difference between the interest yield on 2½% Consols and the dividend yield on ‘blue chip’ ordinary shares — averaged around 1.5%, and could be explained and justified by the relative security of the two investment types. In the inter-war depression (a period when profit was hard to earn and bankruptcies frequent), the guaranteed interest payment on gilts was particularly valuable, especially as deflationary conditions between 1920 and 1935 caused the purchasing power of the fixed income to rise.