It’s the most important market move of 2023…
Normally steady yields on Treasury bonds have skyrocketed.
The 10-year Treasury note yields 4.9%. That’s a 50% jump from March when they paid just 3.25%.
And it’s 880% higher than its March 2020 low of 0.5%.
And as the old-timers on Wall Street say, “Where Treasury yields go, other assets flow.”
Treasury market yields affect everything from the interest rate you pay on your mortgage… to the price of a car loan… to how much you earn on your savings in the bank.
It also has major implications for stocks.
That 4.9% yield compares to an average dividend yield of 1.6% on the 500 blue-chip stocks that make up the S&P 500.
It even beats popular high-dividend-yield stock fund the Vanguard High Dividend Yield Index Fund (VYM). It pays a yield of 3.3%.
And unlike with stocks, you get back the money you paid to buy the bond – your “principal” – when that bond matures.
This raises an obvious question: If you’re looking for income as an investor, should you sell your stocks and buy bonds?
On the surface, it may seem like a good idea. After all, the 10-year T-note yields three times what the S&P 500 yields today.
But when you factor in a key difference between stocks and bonds, a different picture emerges.
Bonds pay a fixed level of income…
That’s why you often hear people call the bond market the “fixed income” market.
Every bond pays something called coupon income. It’s a reference to when you had coupons attached to physical bond certificates that you redeemed for cash.
And coupon income stays the same for the lifetime of the bond.
If you buy a 10-year Treasury note today at a 4.9% yield for $1,000, you earn $49 in income each year for the 10 years until the bond matures. Then you get your $1,000 back.
Over the lifetime of the bond, you’re guaranteed to turn $1,000 into $1,480 as long as the U.S. government doesn’t default.
That’s not bad. But it’s not spectacular, either.
That’s why so many investors seek out income from dividend-paying stocks.
Best-in-breed dividend stocks pay rising streams of income…
Stocks aren’t fixed income securities like bonds.
Companies are free to raise their dividends at will. And the best dividend-paying stocks do this like clockwork.
Take, for example, fast-food franchise giant McDonald’s (MCD).
If you buy shares today, you can pick up a 2.7% yield. That’s just over half what you’ll earn if you buy the 10-year T-note instead.
But McDonald’s grows its earnings over time. And when it does, it increases its dividend.
McDonald’s has raised its dividend for 15 straight years. And over the past 10 years, that annual growth has averaged 7%.
Let’s look at how that would have worked out for shareholders.
If you’d bought shares in 2013, you would have received a $3.24 yearly dividend and paid $94.59 for shares.
Today, it pays a dividend of $6.88 a year.
So, your dollar payout has more than doubled in the past 15 years.
That means your yield on cost – what you earn as a percentage of what you paid – is 7.1%. (The $6.88 annual dividend works out to 7.1% of your purchase price of $94.59).
That’s now 45% more than the fixed 4.9% yield you’d have earned on the 10-year T-note.
And McDonald’s isn’t the only company that grows its dividend like clockwork…
There are 67 companies known as dividend aristocrats.
They’re firms that have raised their payouts to shareholders for at least 25 consecutive years. And they make for great investments…
Here’s how income investing expert and friend of Legacy Research Brad Thomas put it…
A company with a 25-year dividend growth streak today would have started increasing its dividend in the late 1990s, just before the Tech Crash. That means it kept rewarding shareholders through the Financial Crisis, the pandemic, and three recessions.
Companies with this kind of history have built up institutional knowledge and know what steps to take to weather a downturn.
Not only do they survive, but also they keep increasing their dividends even when times are tough.
It takes a huge amount of discipline to manage a growing dividend for 25 or more years. Sure, it’s easy when the economy is roaring. But these companies know good times don’t last forever.
And these stocks have handily beaten bonds over the long term.
The ProShares Dividend Aristocrats ETF (NOBL) has returned 156% over the past 10 years, including rising share prices and reinvested dividend payments.
This exchange-traded fund (“ETF”) holds companies with a long history of growing dividends.
Even at today’s yield of 4.9%, you’d make just 49% on your money if you held a 10-year T-note to maturity. ($1,000 to $1,490 = 49%).
I’m not saying you shouldn’t put some money into Treasurys…
Right now, a 1-year T-bill yields 5.5%. And you get your principal back after a year. That means you don’t have much inflation risk.
So, it’s a perfectly reasonable way to park some cash, at least for the short term.
But if you want rising streams of income, history shows you want long-term positions in the world’s best dividend-raising stocks instead.
One easy way to do that is with a dividend aristocrat ETF like NOBL.
Also, make sure to follow Brad’s ideas for capturing other rising streams of stock market income in his free daily e-letter Intelligent Income Daily. (Sign up here).
Regards,
Chris Lowe
Editor, The Daily Cut