Dividends and Treasury Yields

Dividend-paying stocks have been a great place to be for the past 10 years or so. After the Great Recession in 2008-09, investors looking for yield were forced to look elsewhere from treasury bonds. Treasury bond yields were around the mid-3’s in 2009-10, but quickly fell to the 2% range in 2011 once the Fed’s aggressive quantitative easing (QE) steps took hold as a more proactive force to prop up the weak economy.


The benefit of dividend-paying stocks at that time was clear: earn more than treasury bonds AND have the potential for price appreciation, something that bonds were unlikely to provide given the historic low level in yields. This hand played out very well over the past 10 years as dividend paying stocks, represented by the iShares Select Dividend (DVY) ETF, continuously out-yielded 10-year treasuries AND provided some great price appreciation (see the attached chart for detail). Yes, much more risk trading bonds for equities, but if the need for yield is what drove the investment decision and there was less of a focus or need for price stability, then the investor was aptly compensated.

The question now is, “will this continue?” Can the past 10-years of a “once-in-a-lifetime” scenario continue? Certainly, DVY still has a yield advantage over 10-year treasuries and we are observing a “dovish” Fed currently, so in the near term, “sure”. In fact, tough to see this situation unwind, since if the yield relationship reverses, then there could be a flurry of demand for Treasuries, thus pushing their yields down. We shall see.