Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividends Are Beating Treasuries in May 2026
Transcript
- Lucas: The ten-year Treasury is yielding four point five seven percent right now. That's the highest it's been in over a decade. And yet, over the past five days, dividend-heavy ETFs like VYM and SCHD are up one point three and two point five percent respectively. So the obvious question is: why are investors still chasing dividends when they can get a 'risk-free' four and a half percent from Uncle Sam? Luna: It does seem like a no-brainer on paper. If bonds are finally paying something, why take equity risk? Lucas: Right. And the answer isn't just 'dividends are better' — it's more nuanced. Let's start with the tax piece. Qualified dividends are taxed at long-term capital gains rates, which for most people top out at twenty percent. Treasury interest is taxed as ordinary income — top marginal rate of thirty-seven percent. So that four point five seven percent yield on the ten-year is really worth maybe three point three percent after federal taxes for a high-earner. Meanwhile, a stock like Verizon yielding about four point eight percent keeps most of that. Luna: So the after-tax yield gap actually favors dividends more than the headline numbers suggest. Lucas: Exactly. And then there's the yield curve story. The two-year Treasury is at four point zero eight percent, the ten-year at four point fifty-seven — that spread is only forty-three basis points. It's actually been narrowing. That tells me the bond market is pricing in a slowdown, maybe even a cut later this year. If rates drop, bond prices rise but your reinvestment income falls. With a dividend stock, you're locking in a growing stream. Companies like Coca-Cola and Johnson and Johnson have raised their payouts for decades. No bond does that. Luna: Johnson and Johnson is up two point four percent in the past week alone, and Coca-Cola only up zero point three percent — but that's still positive while bonds are flat. So the market seems to agree. Lucas: And let's look at Verizon — up three point four percent in five days. That's not just yield; that's capital appreciation on top. Treasury bonds give you your principal back at maturity, but the price can fluctuate in the meantime. The ten-year actually lost value this month as yields ticked up from four point four to four point five seven. So even a 'safe' bond hasn't been a smooth ride. Luna: If today was actually useful to you — and I hope it was — the way these conversations stay ad-free is listener support. Buy me a coffee dot com slash fexingo. It's a small gesture that keeps us independent. Lucas: Absolutely. Every bit helps us keep the research desk running. Now, back to the numbers — there's another factor at play here. The Fed funds rate is at three point six four percent, flat. The market is expecting maybe one cut by year-end. That means short-term money market funds are yielding around four percent, which is competitive with bonds. But dividend stocks like the ones we're discussing are offering comparable or better yields with the potential for growth. Luna: So you're saying the bar for bonds to truly win over dividend investors isn't just matching the yield — they have to offer a premium that compensates for the lack of growth. Lucas: Exactly. And historically, the equity risk premium — the extra return stocks provide over risk-free bonds — has been around three to five percent. If you take the ten-year at four point five seven, you'd need dividend stocks to yield something like seven to nine percent to match that premium. But most high-quality dividend payers are yielding between two and five percent. So why are they winning? Because investors aren't just buying today's yield; they're buying the future stream. A company like Procter and Gamble, up one point four percent this week, has raised its dividend for sixty-eight consecutive years. That's a track record no bond can touch. Luna: And P&G's yield is only about two point five percent right now. So the market is paying for that reliability. It's almost like a bond with a built-in raise. Lucas: Right. And that's why we're seeing SCHD — the Schwab U.S. Dividend Equity ETF — up two point five percent this week. It screens for dividend growth and financial health. That's a different risk profile than just buying the highest yield. Meanwhile, DVY, the iShares Select Dividend ETF, is up two point one percent. It focuses on high dividends, but also quality. Luna: Are there any warning signs? When does the calculus flip back to bonds? Lucas: If the ten-year pushes above five percent — and the thirty-year is already at five point one — then bonds start to look more attractive even after tax. But we'd also need to see the yield curve steepen. Right now, a flat curve suggests the economy is slowing. In that environment, dividend stocks with defensive characteristics tend to hold up. We saw that in 2022 when bonds got crushed but dividend ETFs only fell half as much. Luna: So the message for May 2026 is: don't abandon dividends for Treasuries just yet, but keep an eye on the ten-year yield. Lucas: Exactly. And if you're building an income portfolio, the key is diversification across both. But for now, the data says dividends are still delivering the better total return.