Japan Corporate Dividend Yields Offer Buy Signal: Chart of Day

By Patrick Rial

Sept. 18 (Bloomberg) -- Rising dividend payments from Japanese companies increased the difference between stock and government bond yields to a record. The last time the gap was close to this level, the equity market began a four-year rally.

The CHART OF THE DAY shows the spread between an index of yields on shares listed on the main board of the Tokyo Stock Exchange and the payout for 10-year Japanese government bonds. Corporate dividend yields were 2.13 percent today on a trailing basis, giving investors 63 basis points more than the 1.5 percent they receive for bonds, data compiled by Bloomberg show.

``Buying when the spread is where it is has historically been a smart move for intermediate-term investors,'' said John Vail, who helps oversee about $106 billion as head of global strategy at Nikko Asset Management Co. ``Japanese individuals look for high yields and now they're getting very little in bank deposits and not much in bonds, so eventually the market will seek an equilibrium and companies with high dividend yields will be pursued.''

Improving profitability and low debt levels boosted cash on hand at Japanese companies, allowing them to respond to investors' calls for higher dividends. The payout ratio, the percentage of net income distributed as dividends, among Topix index companies has climbed to 28 percent from 16 percent in 2003, according to data from Nikko.

Corporate dividend yields have exceeded long-term bonds three times in Japan's history. In June 2003, when the yield spread reached a maximum of 60.5 basis points, the Topix rallied by almost a third in the following 12 months and more than doubled during the next four years. In the 12 months following October 1998 and July 2005 the Topix climbed at least 30 percent, according to data compiled by Bloomberg.

To contact the reporter for this story: Patrick Rial in Tokyo at prial@bloomberg.net.