Yield Gap

Also known as yield ratio. The yield gap compares the dividend yield on equities with the yield on long-term government bonds. It is used to assess whether equities are under or over-priced compared with government bonds. The dividend yield on equities (the dividend expressed as a percentage of the share price) is usually significantly higher than the yield on bonds, reflecting the greater risk of holding equities. When equity prices rise their dividend yields fall and vice versa. If the yield gap is small equities are considered to be expensive compared to bonds, if large they are often considered to be cheap.