Interest rates have been soaring higher…
A month ago, 10-year Treasuries yielded 4.2%. Now, those same bonds yield 4.8%.
As bond yields go up, bond prices go down. And after years of near-zero interest rates, bond yields have rapidly increased to levels not seen since 2007.
That means many bond investors are looking at large losses as the value of their bonds go down. Over the past three years, the value of 10-year Treasuries issued in 2020 has dropped by 46%.
Now the owners of those bonds have to decide if they want to sell at a big discount or get stuck with a low yield until their bonds mature.
For months, we’ve been sharing our favorite income-producing plays that can deliver bond-beating returns over time.
And today, I’ll show you why…
Dividend Stocks vs. 10-Year Treasury Bonds
Would you rather own a 10-year Treasury note that yields 4.8%… or shares of a 3.7% yielding company that grows its dividend 7% every year?
If you’re like most folks, you’d probably pick the bond because you think it will give you more income.
But that would be a mistake.
Although it may have lower starting yield, the shares are likely to produce more income than the bond over the next 10 years.
As rates increased, stocks were also crushed. Utilities were one of the hardest hit sectors.
And that has created opportunities to invest in high quality dividend growers at attractive prices.
One example is NextEra Energy (NEE).
NextEra is Florida’s largest utility company. And it is also one of the largest developers of renewable energy projects in the U.S.
NextEra shares are down nearly 40% this year. That has made its dividend yield increase to 3.7% – the highest level in over a decade.
And if you were to buy NextEra today, it would likely give you more income than a 10-year Treasury over the next decade.
Here’s how…
The Numbers Don’t Lie
NextEra has grown its dividend 29 years in a row.
Over the past 10 years, NextEra has increased its dividend at an average rate of 11% per year. But the company says that it will grow at a 6-8% rate in the future.
That means that it should be able to keep increasing its dividend at a 7% rate.
So let’s see where an equal investment in each would get you.
If you invested $10,000 into a 10-year Treasury at 4.8%, you would get $480 in interest every year for 10 years.
If you invested $10,000 into NextEra, it would pay you $370 in dividends this year. But next year, that would increase by 7% to $396. And then $424 the year after that…
By the 10th year, NextEra would be paying you $680 every year in dividends. If you add it all up, NextEra gives you more income than the bond over the next ten years.
And the income from NextEra has another advantage – it’s a qualified dividend, which means that it is taxed at a special lower rate. For many people, taxes on qualified dividends are just 15% compared to the 22-24% they pay on regular income.
Even better, folks earning less than $44,725 ($89,450 if married) don’t have to pay taxes on qualified dividends at all. There’s a good chance you qualify if you’re retired.
Let’s compare the after tax income from the investments we looked at earlier:
NextEra puts nearly 16% more income in your pocket over the next decade even though it starts with a much lower yield.
Beat Bond Returns with Dividend Stocks
And that’s not the end of the story.
After 10 years, you’d get your $10,000 back from the bond investment.
But if NextEra continued growing its earnings at the same pace as its dividend, its earnings would be 84% higher 10 years from now.
If the market values it at the same 17x earnings that it trades for today, your $10,000 investment would be worth $18,400.
Between the dividends and the potential for shares to increase in value, NextEra can earn you three times as much as the bond… while still providing reliable income.
A dividend stock may start off with a lower yield than a bond. But its dividend growth and special tax advantage can make it a better income investment in the long run.
That’s why I recommend you start investing in companies with growing dividends right now.
The more time your investments have to compound and grow, the bigger your income stream will be.
And our Intelligent Income Investor service can help you find blue chip stocks that will grow their dividends for decades to come.
Our Sleep Well At Night (SWAN) portfolio has the highest-quality dividend paying companies the market has to offer. Including a unique income setup I just spotted in the markets, which you can learn more about here.
Instead of settling for whatever the bond market offers, you can take charge of your wealth-building journey by setting up your own income stream today…
Happy SWAN (sleep well at night) investing,
Brad Thomas
Editor, Intelligent Income Daily