With yields rising, are Treasury securities a better buy than dividend-paying stocks now?
Why choose stocks when some Treasury securities’ rates are so high?
There’s a lot of debate now about this question. Treasury securities–both TIPs and I-bonds–are yielding more that many stocks now. If one’s goal is income, wouldn’t it be better to switch to Treasurys ?
In my view, one is not better than the other. Both have advantages and disadvantages.
Treasuries are backed by the U.S. government, and as such they are considered the safest form of securities. Stocks are backed by the business prospects of the company, and by economic conditions in general.
When interest rates rise, some companies raise their dividends to entice investors. When dividends rise, the yield of the stock rises, and as a resukt, some investors often become more interested in the stock. If a stock’s yield rise interests investors, the price could rise from additional buyers.
However, when interest rates rise, all bond-like securities, including Treasuries, tend to fall in price. This is due to the inverse relationship between the two: yield and price.
Therefore, in a rising interest rate environment, buying bonds should be done with the expectation of a higher yield, not a higher price. With most bonds, like I-Bonds, which are a form of savings bonds, the owner gets the full price upon maturity. However, yields for TIPs and I-bonds all vary–they are reset periodically.
An owner of a stock is a part-owner of the company. Thus, along with all other stockholders, each owner shares in the benefits and risks of owning the stock. Business conditions dictate the financial state of the company. Over time, there many be dividend increases, dividend cuts, stock splits, spin-offs, or other major or minor changes to a company’s situation.
Because of the inverse relationship between yield and price for bond securities, the goal of the investor is important. If the goal is capital gains, the best time to buy is when rates are very high and start to decline. Declining rates means price increases. If the goal is income, the best time to buy is when rates are low and start to increase. In the latter case, the price will fall during yield increases.
I have considered TIPs and/or I-bonds, but have not pulled the trigger. The life span of these securities gives me pause. I-bonds take 30 years to mature. TIPs have various maturities: 5 or 10 or 30 years. In all cases, I contend that interest rates will definitely vary greatly before any of them mature.
Did you choose Treasuries? Let me know here.
The illustration of The Great Swallow-Tailed Butterfly is from “The genera and species of British Butterflies, described and arranged according to the system now adopted in the British Museum” by Henry Noel Humphreys, published in 1860. Courtesy, Biodiveristy Heritage Library.
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