Read more
What happened: On August 18, 2022, the 30-year Treasury yield topped 5.33%, its highest level since 2007, outpacing the dividend yield of the Schwab U.S. Dividend Equity ETF by 2.2 points. This development comes as interest rates have risen, making long-term Treasuries more attractive for income investors. Four S&P 500 stocks—Altria (MO), Pfizer (PFE), Healthpeak Properties (DOC), and Verizon (VZ)—offer yields above 5.2%, comparable to the 30-year Treasury. However, Jim Cramer suggests older investors should consider 30-year Treasuries over growth stocks due to their compelling income alternative, framing the long bond as a core holding.
Market impact: This shift in yield dynamics affects income-oriented investors and dividend-paying companies. Dividend stocks like Kroger, Coca-Cola, and PepsiCo, which previously offered higher yields, now lag behind Treasuries. This could lead investors to reallocate funds from dividend stocks to bonds, potentially impacting the valuation and performance of these companies. Historically, when the long bond yield was this high, dividend cuts among U.S. stocks increased, suggesting potential risks for investors in dividend stocks.
What to watch next: Investors should monitor the upcoming Federal Reserve meeting on September 21, 2022, to gauge the central bank's stance on interest rates and their impact on bond yields. Additionally, earnings reports from dividend-paying companies such as Coca-Cola (KO) on October 25, 2022, and PepsiCo (PEP) on October 4, 2022, will provide insights into their ability to maintain or grow dividends amidst rising interest rates. Lastly, the yield spread between the 30-year Treasury and dividend stocks will be a key metric to watch, as it could signal further shifts in investor preferences.