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-- 339.660 As the 10-Year yield reached 4%, should investors consider selling dividend stocks for treasuries?
The U.S. 10-year treasury yield has reached 4%, which is the highest level since 2007, spurred by the Federal Reserve's interest-rate hikes over the past 15 months. As bond yields surge overall, the 10-Year Treasury yield appears attractive compared to the dividend payout rate for U.S. equities (S&P 500). This trend has made fixed-income securities more competitive than stocks, especially when compared to the period before the Fed hikes began in March 2022.
Many blue-chip dividend stocks, including $Johnson & Johnson (JNJ.US)$ (3%), $Walmart (WMT.US)$(1.48%), and $McDonald's (MCD.US)$ (2.07%), do not offer a 4% yield, creating a critical question for investors:
Should they abandon dividend stocks and shift their investments to treasuries instead?
Why treasuries?
Treasury bonds, notes, and bills are fixed-income securities backed by the federal government that offer investors a guaranteed cash return at maturity. The yield of a bond, expressed as a percentage of its face value, is a key factor in determining investor returns. For instance, a 10-year Treasury bond with a yield of 4% will provide an investor who buys it for $100,000 with $4,000 in annual interest payments until the bond matures in 10 years. At maturity, the investor will also receive the full $100,000 face value of the bond.
Despite the lower rates that often accompany treasuries, they also offer zero default risk, providing investors with peace of mind and stability in their portfolios. The surge in yield to 4% has been particularly appealing to investors seeking high returns in the current financial landscape.
Why dividend stock?
While Treasury yields can provide stability during a downturn, investors should carefully consider their financial goals and risk tolerance before investing. Locking cash into 10-year Treasuries may limit investment opportunities in companies that offer higher yields and dividends.
Despite this, dividend stocks remain a viable option for investors during a recession. "Recession-resistant" industries such as consumer staples, utilities, and healthcare can offer protection and dividends during market downturns. However, these sectors also come with a higher level of risk than Treasury notes or bonds.
Investors can look to historical performance to discover companies that have offered sustained growth and returns during and after a recession. For example, $Walmart (WMT.US)$weathered the storm of the Great Recession from 2007 to 2009 and performed well as consumers looked for cost-effective options. Although its 1.48% dividend yield falls short of the Treasury's 4%, the stock's price appreciation over the past five years shows promise. Investors seeking both dividends and sustained future growth could find their niche in companies like Walmart during times of economic uncertainty.
Diversification is the key
Estimating total returns for equities is a complex task that involves pairing dividend yields with expectations for capital gains or losses. While dividend yield provides a reliable measure of expected dividends, projecting capital gains and losses is speculative, especially in the short term.
Recent market trends show the 10-year Treasury Note becoming more competitive against the S&P 500 than it has been in 16 years. However, investors should not view this as a signal to dump stocks and load up on bonds but rather consider tilting their portfolios towards bonds, especially if they have fallen below strategic target allocations. Diversification in both investments remains essential.
Investors must also take into account age-based allocation, as younger and older investors have different investment goals and risk tolerances that result in different investment strategies.
While stocks are likely to outperform bonds over the long run, the wide yield spread in favor of the 10-year Note makes it an attractive option for asset allocation calculus in the short term, particularly over the next decade.
Disclaimer: Moomoo Technologies Inc. is providing this content for information and educational use only.
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Pink panther : this article was extremely informative
70973694 : The last sentence of the third to last paragraph sums up the entire article. Even though the 10 year might be offering yield slightly higher than a dividend payer that dividend payer does have the added value of compound in growth. So diversification is definitely the key to a well balanced portfolio.
Tavore Ebisu : More stocks for me then