The 10-year treasury yield is now at 4%. With such a high yield, investors may be wondering if they should still be investing in dividend stocks.
Many of the biggest blue-chip dividend stocks out there don't pay a 4% yield. For example, Johnson & Johnson (JNJ) has a 3% yield, Walmart (WMT) has a 1.48% yield, and McDonald's (MCD) has a 2.07% yield.
So does this mean investors should ditch dividend stocks and buy government bonds instead?
The case for bonds
Treasury bonds, notes, and bills are fixed-income securities offered to consumers and investors backed by the federal government. When buying bonds, investors are lending the United States government money through the purchase amount. The yield in a 10-year Treasury bond is the annual return that an investor can expect to receive if they buy the bond and hold it until maturity. The yield is expressed as a percentage of the bond's face value. For example, the yield on a 10-year Treasury bond is 4%, so then an investor who buys the bond for $100,000 will receive $4,000 in interest payments each year until the bond matures in 10 years. At maturity, the investor will also receive the full $100,000 face value of the bond.
What's key here, however, is that while there are plenty of bond yields to consider, treasuries have zero default risk. Therefore, you can be guaranteed to see that cash in your portfolio at the end of your maturity date. That being said, this usually means rates are far lower, which is why the surge in yield to 4% has been so appealing to investors. Yields can rise and fall, just like every other part of the market and economy, depending on the conditions. So if you're an investor looking to take advantage of a high yield that may drop in the near future, it might seem like now is a good time.
Here is a 5 year chart of the 10-Year Treasury:
The 10-year treasury bond can provide safety during these volatile times. While investors continue to enjoy a bullish market, there is still volatility present. The S&P 500 ($SPX) and Nasdaq ($NASX) have fluctuated as of late, with inflation data due and the Federal Reserve continuing to focus on reducing the inflation rate down to 2%. This would likely mean more interest rate hikes, leading investors to lean towards keeping their cash safe in bonds.
While investors may not see large returns over the years, these treasuries can be used to put a portion of your cash aside for safe keeping. That way, should the market tank, you can rest easy at night knowing at least a portion is kept out of the fray. This can be especially beneficial for those nearing retirement, who will need the cash sooner as opposed to later.
The case for dividends
While Treasury yields can be beneficial during a downturn, it's important to note that investors should take into consideration their own financial goals and risk tolerance. A recession could occur, but it will eventually come to an end. Now, you've locked up your cash for 10-years potentially, without the ability to invest in companies that might offer dividends as well as higher yields.
That's why investors may also still want to consider dividend stocks as an investment, even during a recession. Investors should look for industries that are considered “recession resistant," and the companies within those industries providing protection and dividends during a downturn. Industries such as consumer staples, utilities and healthcare are all options. Yet within those sectors, there is certainly more risk than what you would receive by purchasing Treasury notes or bonds.
No one can predict the future, but investors can look to historical performance to discover companies that might offer yields and higher returns during and after a recession. One such company would be Walmart (WMT), with a history of staying afloat even during downturns.
Take the Great Recession of 2007 to 2009. Companies such as Walmart tended to perform well as consumers looked to reign in their spending habits. While its 1.48% dividend yield isn't close to the Treasury's 4%, investors can capitalize on the stock's price appreciation. For instance, during the last five years Walmart stock went up by 77%! So investors seeking dividends for some extra cash could also look forward to sustained future growth, even if the economy sputters.
What's more, consider holding your dividend stocks for the long-term. In the last 10 years, Walmart stock increased by 111%. That's more than double your original investment. That's a great purchase even if you buy at peak prices. For example, if you had bought Walmart stock at the heights of the Great Recession you're investment would have appreciated by 200% in the past 14 years.
So again, even with dividend yields below that of the 10-year investors could still see their returns from dividend stocks far outweigh what they would receive from treasuries.
Diversification
Investors should NOT ditch dividend stocks for treasuries. Instead they should continue to diversify in both investments.
However, based on an investor's age, allocation is important. Younger investors and older investors have different investment goals and risk tolerances, which can lead to different investment strategies.
Younger investors typically have a longer investment horizon and can afford to take on more risk. They may be more likely to invest in stocks, which have the potential for higher returns but also carry more risk. Younger investors may also invest in treasuries but with a smaller allocation.
Older investors typically have a shorter investment horizon and are more risk-averse. They may be more likely to invest in treasuries with a larger allocation as a way to protect their retirement nest eggs. Older investors may also invest in dividend stocks, but they may choose to invest in safer stocks with lower yields.
On the date of publication, Amy Legate-Wolfe did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
