Are Treasury Bonds Now the Better Income Play?

After three rounds of Fed rate hikes over the past 15 months, the yields on Treasury bonds are suddenly respectable. At 2.5% as of this writing, the 10-year U.S. Treasury note boasts its highest yield in more than two years, and nearly double its 1.37% yield last July. The yield on a 30-year Treasury is 3.1%, also just off two-year highs.

Meanwhile, with the huge run-up in share prices since the election, yields for dividend stocks have slipped—the average yield among S&P 500 stocks is down to 1.92%, its lowest point since December 2014. In the eight years since the Federal Reserve dropped short-term interest rates to near zero in response to the worst recession since the Great Depression, bond yields have mostly trailed dividend stock yields. With traditional income investing avenues like CDs, money market accounts and Treasury bonds essentially worthless, yield seekers have turned their attention to dividend stocks, driving up prices on stocks that have historically been slow to grow.

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The SPDR S&P Dividend ETF (SDY), whose holdings include large-cap dividend stalwarts such as AT&T (T), Chevron (CVX) and Consolidated Edison (ED), has nearly tripled in the last eight years, after declining nearly 50% in the three years that preceded the recession. Dividend stocks, particularly high-yield dividend stocks and Dividend Aristocrats, were a hot commodity in a low-interest-rate environment. Now that interest rates are on the rise again, will yield seekers switch gears and go back to bonds?

They haven’t so far. The SDY is up 15.2% since the Fed’s first rate hike in December 2015—outpacing the 14.6% gain in the S&P 500. Higher Treasury bond yields have yet to be enticing enough to coax investors out of their dividend stocks. Don’t expect them to anytime soon—not in the midst of a bull market, where many dividend investors get high yields and outstanding share price growth.

And remember: the 1.92% yield on the S&P 500 is an average, one that includes the index’s 75 or so non-dividend payers and those that yield less than 1%. It’s easy to find dividend stocks that offer higher yields than either 30- or 10-year Treasury bonds, plus market-beating returns.

If you want specific recommendations, I highly suggest taking out a subscription to Chloe Lutts Jensen’s Cabot Dividend Investor advisory. Chloe’s portfolio currently features 10 stocks that yield more than the U.S. Treasury, and an average total return of 17%. There are a few corporate bonds in there too for those who want a balance of both bonds and equities. If you’d like to join, click here.

Even if you don’t want Chloe’s help, I wouldn’t go selling off your dividend stocks just because Treasury bonds now yield 2.5%. There are simply too many good high-yielding equity opportunities in this market to ignore.

Chris Preston

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Investment analyst and Chief Analyst of Cabot Wealth Daily, Chris Preston brings you all the latest from the investing world. Sign up to get updates and breaking news delivered FREE to your inbox. Get unlimited access to our library of complimentary investing reports.

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