Dividend stocks are your best bet in a world where interest rates are mired near zero and Treasury bond yields have plummeted.
It was brief, but the 30-year Treasury bond yield dipped to an all-time low of 2.398% Wednesday morning. It has since bounced back above 2.4%. But the new low was a clear message to all income investors.
Treasury yields have been on steady decline for a full year. Entering 2014, the 30-year bond yield was hovering around 3.75%. Now it’s touching record lows. The chart below reveals how precipitous the drop-off has been in the last three months.
30-Year Treasury Bond Yields, 1-Year Performance
So now, with 30-year bonds yielding less than they have at any point in U.S. history – and roughly half what they were yielding as recently as 2011 – the gap between bond yields and the yield on an average dividend stock has rarely been more narrow over the past decade.
The average dividend yield of the S&P 500 right now is 1.9%. That’s well below the 3.2% average yield in 2008, and even the 2.2% yield of three years ago. But it’s not far below the 2.4% yield of the 30-year Treasury bond. The 0.5% gap between the Treasury yield and the average stock yield is the closest the margin has been since mid-2012.
With the Fed still wishy-washy on whether or not it will finally raise short-term interest rates this year as “promised,” Treasury bond yields aren’t likely to suddenly reverse course in the near future – at least not in a meaningful way. As a result, investors will continue to flock to dividend stocks as an alternate source of income.
To appease those investors, the growing number of dividend-paying companies – which now comprise roughly four-fifths of the S&P 500 – will keep raising their payouts to attract more income-seeking shareholders. Eventually, that will increase the average yields – especially if stocks continue to fall the way they have to start 2015.
So the difference between dividend stock yields and Treasury bond yields is likely to remain relatively trivial. And when you consider that the S&P’s dividend average includes the 100 or so stocks that don’t even pay a dividend, the gap between actual dividend-paying-stock yields and Treasury bond yields is even slimmer.
What holds more appeal: a blue-chip dividend payer with a 2.9% yield and 50 years of annual dividend growth history (think: Procter & Gamble (NYSE: PG)), or a 30-year Treasury bond that yields 2.4% and probably won’t exceed a 3% before the year is out? The answer, for many income investors, is now – and will continue to be – the dividend stock.
That’s how low-beta stocks such as Procter & Gamble, Johnson & Johnson (NYSE: JNJ) and Wal-Mart Stores (NYSE: WMT) have all risen more than 9% in the last year. Those types of big moves are rare in large, Dividend Aristocrat stocks such as these. Or at least they were until interest rates went in the tank. Now, safe dividend growers are the best place to find steady, reliable income.
For that reason, dividend stocks should continue to prosper. Until short-term interest rates budge from near zero, and Treasury bond yields stop falling to record lows, dividend stocks are your best alternative as an income investor.
Perhaps your only alternative.
Dividends for Every Month of the Year
If you’re looking for just one dividend stock to round out your income stream, consider a little-known company that pays out dividends 12 months of the year. Click here to see the full details of this company in my Dividend Calendar…