J. Bradford DeLong and Konstanin Magin (2008), "The U.S. Equity Premium: Past, Present, and Future" http://www.j-bradford-delong.net/2008_pdf/20080228_jep_submit.pdf
ABSTRACT: For more than a century, diversified long-horizon investors in America’s stock market have invariably received much higher returns than investors in bonds: a return gap averaging some six percent per year that Rajnish Mehra and Edward Prescott (1985) labeled the “equity premium puzzle.” The existence of this equity return premium has been known for generations: more than eighty years ago financial analyst Edgar L. Smith (1924) publicized the fact that long-horizon investors in diversified equities got a very good deal relative to investors in debt: consistently higher long-run average returns with less risk. As of this writing the annual earnings yield on the value-weighted S&P composite index is 5.53%. This is a wedge of 3.22% per year when compared to the annual yield on 10-year Treasury inflation-protected bonds of 2.31%. The existence of the equity return premium in the past offered long-horizon investors a chance to make very large returns in return for bearing little risk. It appears likely that the current configuration of market prices offers a similar opportunity to long-horizon investors today.
