Above is a graph of realized yield from owning the S&P 500 vs the 10 year treasury for any given year.  In the case of the treasury yield I used the average for the previous year as a proxy for what you might expect in the coming year.  Importantly, I am not including any capital gain or loss from yield changes.  For stocks the yield is comprised of actual earnings for the next year plus the dividends paid out.  As with bonds, I have not included any capital gains/losses from changes in the value of the S&P.

The orange column represents 2012 with a best estimate from Yardeni Associates or about $105 in S&P earnings and about 2% dividend yield.  The dashed line represents the average for the whole 50 odd year sample.

I bring this up because I feel it is important to place some longer term context of what one should expect from stocks vs bonds.  In addition it frames my way of thinking of stockholders being the owners of businesses.  Investors should think like owners and not traders, in my view.  Ask yourself why you own stocks?  Sure, you want a claim in a growing business, but what if they never paid anything to the owners?  What would that be worth?  It's not as silly a question as it sounds on the face of it.  Think of all the "growth" companies that go bust.  At least if they paid something to shareholders there would be some   tangible value and, very importantly, it is harder to play accounting tricks when actual cash is being paid out.

Again, I think growth stocks play a role in a portfolio, but for the investor it is wise not to overload.

Getting back to the yield picture, buying stocks in the late 90's early 2000's was a gamble on growth.  I think we are now in a more healthy period for investors where there is more balance to equity returns.  Even at current levels of the S&P ~1400 the prospective yield premium is in the high 6's and at that level one should have a reasonable exposure to stocks if not a bit of overweight. That does not mean you have to be there immediately, remember this is a long term game.