Retirees and near-retirees should consider investing in dividend stocks over Treasurys for better long-term returns. The article compares the two investment options and highlights the advantages of dividend stocks.
Troy D. Hanson
November 17, 2023
As the interest rates continue to decline, many retirees and near-retirees are considering investing in Treasurys for a guaranteed return. However, it is important to understand why dividend stocks may still be a better long-term investment option, despite their lower yield compared to Treasurys.
Treasurys: A Short-Term Gain
Over the past month, the 10-year Treasury's yield has dropped significantly. This sudden decline has led some investors to believe that they need to act quickly in order to secure a higher return that surpasses even the conservative dividend stocks.
The Case for Dividend Stocks
Retirees and near-retirees must carefully evaluate the risk involved in choosing Treasury bonds over dividend-paying stocks. While Treasurys may offer slightly lower risk, they come at the expense of expected return.
Comparing Treasurys to Dividend Aristocrats
To illustrate this point, let's compare the 10-year Treasury (BX:TMUBMUSD10Y) to the S&P 500 Dividend Aristocrats (XX:SP50DIV). The Dividend Aristocrats are a group of stocks within the S&P 500 index that have consistently increased their dividends for at least 25 consecutive years. While this is just one example, similar conclusions can be drawn from other groupings of dividend stocks.
In summary, while dividend stocks may have lower yields than Treasurys, they are likely to be superior long-term investments. Retirees and near-retirees should carefully consider the potential returns and risks associated with both options before making their investment decisions.
Yield: The Hidden Advantage of Dividend Stocks
When comparing the Treasury yield of 4.4% to the Dividend Aristocrats yield of 2.4%, the choice may seem obvious. However, a closer look reveals a different story, especially when considering a 10-year holding period. Over the next decade, dividends are likely to increase, and if they do so at their historical average, the Aristocrats have the potential to outperform the Treasury, even with a marginal increase in price.
To better understand this, let's examine the required rates of return, as summarized in the table below. One noteworthy example is the S&P 500 Dividend Aristocrats, whose dividends per share have grown at an annualized rate of 6.64% since 2000, according to Howard Silverblatt, a senior index analyst at S&P Dow Jones Indices. If we assume this growth rate continues over the next decade, the Aristocrats need only a 1.07% annualized price-only return to surpass the 10-year Treasury.
This appears to be a conservative estimate. It is highly likely that the Dividend Aristocrats will achieve a much higher 10-year price-only return compared to the Treasury, which offers no potential for growth when held until maturity.
Additionally, even if we assume lower growth rates for the Aristocrats' dividends per share, the required rate of return only marginally increases, further strengthening their competitive position.
In conclusion, don't fall into the trap of assuming that the higher Treasury yield guarantees better returns compared to dividend stocks. Based on modest and safe assumptions, dividend stocks have a clear advantage over the long run.
About Mark Hulbert
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