Treasury Bonds Pay More Than These Dividend Stocks — Should You Sell Your Stalwarts?

Government debt is paying more than some dividend stocks right now, and investors are weighing whether it makes sense to pivot toward bonds for passive income. The comparison between long-term Treasury yields and the payouts from dividend stalwarts has become a central question for investors looking for regular income without much risk.

Treasury yields have risen sharply in the past 12 months, and the question for income investors is simple: should you buy government bonds or dividend stocks? The math is changing fast.

Inflation Has Not Relented

The Consumer Price Index (CPI) rose 3.4% year over year in August due to geopolitical tension in the Middle East. Inflation already exceeded the Federal Reserve’s 2% target before that conflict erupted.

The market now expects inflation to stick around for longer than initially expected. That has pushed 10-, 20-, and 30-year Treasury yields significantly higher in the past year. The assumption is that interest rates will stay elevated for an extended time, at least compared to most of the 2010s.

The Yield Comparison

By Sept. 16, the 10-year Treasury yield sat below 5%. Bond investors could earn over 5.3% on both 20-year and 30-year securities.

The 10-year Treasury is the investment being studied here, and it provides a holding period that matches what long-term stock investors typically expect. Its yield comes with the backing of the full faith and credit of the U.S. government, which gives it a dependable track record for generating income.

Because these financial instruments are free from state and local taxes, their final returns get a lift.

The Risks of Bonds

The danger here is simple: if you sell these Treasuries before they mature, you lose.

When interest rates move up or down, the value of existing bonds shifts in the opposite direction. Higher rates push bond prices down, while lower rates lift them. This effect is amplified for bonds with a longer duration, which are more sensitive to changes in interest rates.

The other hazard comes from rising prices. Should costs throughout the economy continue to climb, those who purchase Treasuries now run the risk that their earnings will not match the inflationary pressure they are facing. That mismatch could produce a real loss rather than a gain.

Dividend Stocks Offer Growth Potential

In this writer’s opinion, owning blue-chip dividend stocks beats the alternatives, even though the risks are significant.

Investors who own equity positions face two main risks. One is that management teams cut or put off dividend payments. The other is that these companies might lose their competitive standing. Both risks can push stock prices down, leading to capital losses.

Investors have already claimed growth potential, and U.S. Treasuries do not offer that same advantage.

Coca-Cola’s 2.4% dividend yield and Procter & Gamble’s 2.95% dividend yield are much lower than the almost 5% that 10-year Treasuries pay. That gap is the comparison at the heart of this argument.

Track Records and Appreciation

What truly counts here is how the company’s payouts to shareholders have performed over recent years. Over the last ten years, the beverage stock’s dividend has increased by 51%. The consumer goods company’ has raised its dividend by 63%.

Debt investors in the United States will not see those gains. Considering their histories, the danger that dividends get interrupted appears slight.

The makers of Coca-Cola have increased their dividend for 64 years running. The company behind Procter & Gamble has paid a dividend for an astounding 136 years without a break, including a 70-year run of raising the payment.

The rise in stock prices has added to returns. Over the past decade, shares in Coca-Cola have risen 108%, while Procter & Gamble shares have gained 67%. This strong performance serves as a notable distinction that bolsters the argument for holding these dividend stalwarts instead of U.S. Treasuries.

What to Watch Next

There remains no final answer on this point. Higher interest rates damage bond prices, and the material offers no explanation of their effect on equities.

“If changes in prices across the economy increase, investors who buy Treasuries today face the risk that they might not earn a yield that compensates for inflationary pressures.”

Both assets carry that risk, but they come with different terms attached. Bonds provide a set income stream that can be counted on, whereas stocks depend on management continuing to pay dividends.

Neither option is flawless. Each carries its own dangers. The decision rests on what you hope to get from your funds.

Dividend stocks grow faster than government debt, yet they pay less. Government debt, meanwhile, pays more now but offers no growth. The contrast between the two is plain to see.

Neither is perfect. Both carry risk.

Source material: “Long-Term Treasury Yields Now Beat These Dividend Stalwarts. Is Government Debt the Top Passive-Income Play?,” Yahoo Finance.

bonds · dividends · passive income · stock investing · Treasury yields