Yield gap

The yield gap is the difference between the average dividend yields in a market and the bond yields in the same market.

By "market" we would usually mean either a national market or the global markets for shares and bonds.

The yield gap is a useful measure of the valuation of a stock market and can be an indicator that a market is over or under valued. An unusual yield gap can be justified by higher or lower growth expectations.

The yield gap is also changes over time in response to changing conditions. For example, if companies commonly choose to increase share-buy backs rather than dividends, the yield on shares will fall. There are a number of reasons why companies might choose to do this, including tax structures, and the widespread tying of directors remuneration to share prices.