Dividend yield vs bond yield: the gap that signals value

Two yields, two assets

Dividend yield is the cash a company pays you each year as a percentage of the price you pay for the share. A stock at 200 rupees paying a 6 rupee annual dividend has a dividend yield of 3%. It is the income return on an equity, before any capital gain. Bond yield is the return on a fixed-income instrument, and the benchmark in India is the yield on the 10-year government security, the G-sec, which is considered the risk-free rate because the government is assumed not to default. As of mid-2026 that 10-year yield sits near 7%.

These two yields represent the income from the two great asset classes: the riskier equity and the safer bond. Every investor allocating capital is implicitly choosing between them, weighing the higher potential return and risk of stocks against the steadier, guaranteed return of government bonds. Comparing their yields is one of the oldest ways to judge whether that trade-off currently favours one side or the other.

The earnings yield and the yield gap

Dividend yields alone understate what equities offer, because companies retain a large part of their profit to reinvest rather than paying it all out. So the cleaner comparison uses the earnings yield, which is the inverse of the price-to-earnings ratio. A market trading at a P/E of 20 has an earnings yield of 5%, meaning the underlying companies earn 5% of their price each year, paid out or retained. The earnings yield is the like-for-like number to set against the bond yield, because both then measure annual return per rupee invested.

The gap between the two is the signal. When the equity earnings yield is well above the bond yield, stocks are paying you more per rupee than safe bonds, a sign equities are relatively cheap and the risk is being rewarded. When the bond yield rises close to or above the earnings yield, the safe asset is offering nearly as much as the risky one, which makes equities look expensive and bonds newly competitive. This is exactly why rising bond yields pressure stock valuations: they shrink the gap, and the higher risk-free return raises the bar equities must clear to justify their risk.

Using the comparison sensibly

The yield gap is a relative-value frame, not a precise switch. A high-dividend stock is not automatically a buy, because an unusually high dividend yield can be a warning that the price has crashed on a deteriorating business, which is the value trap a separate concept covers. And the earnings-yield-versus-bond-yield comparison shifts every day as both prices and yields move, so it is a slow-burning context gauge, not a daily trade trigger.

Read it the way the asset-allocation desk does. When the 10-year G-sec yield is high, near 7% as of mid-2026, the income alternative to equities is meaningful, and the market has to offer a clearly better earnings yield to compensate for equity risk. When bond yields fall, the bar drops and equities can support richer valuations. The practical takeaway is that you should never look at a stock's valuation in a vacuum: the attractiveness of equities is always relative to the safe yield available next door, and the yield gap is the lens that makes that relationship visible.

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