30-Year Treasury Yield Surpasses Dividend Stocks by 2.2 Percentage Points – Lessons from History

Income investors reached a notable milestone this week. On Tuesday, August 18, the 30‑year Treasury yield climbed above 5.33%, its highest level in 19 years, driven by concerns over inflation and rising government spending that pushed long‑term rates upward.

The Schwab U.S. Dividend Equity ETF (NYSEMKT:SCHD), a $109 billion fund holding roughly 100 dividend‑paying stocks, currently yields about 3.1%. That creates a gap of approximately 2.2 percentage points in favor of the Treasury—a guarantee backed by the U.S. government for 30 years.

Investors have not faced a comparable choice since 2007. Treasury data shows the long bond last yielded this amount in June of that year, when it peaked at 5.35%.

What occurred the last time the long bond yielded this level? The outcome is not comforting for either bonds or stocks.

Image source: Getty Images.

The bond kept its promise

Anyone who locked in the 5.35% yield on the long bond in June 2007 received exactly that: 5.35% per year, fixed for three decades.

The gain arrived sooner than the payment schedule suggested. As the financial crisis unfolded, the 30‑year yield fell to 2.69% by the end of 2008, dropping to 2.53% in December. Lower yields push bond prices higher, so an investor who bought at the mid‑2007 peak yield enjoyed a locked‑in income stream plus a substantial price appreciation within roughly 18 months.

It is easy to overlook long‑term bonds when equities are performing well, yet in a downturn of the magnitude of 2008, the bond proved to be the delivering asset.

Then came 804 dividend cuts

The equity‑income side moved in the opposite direction. Standard & Poor’s recorded 110 negative dividend actions among U.S. common stocks in 2007, 606 in 2008, and 804 in 2009.

During the first quarter of 2009 alone, indicated dividend payments declined by a net $43.8 billion—a quarterly record that even the worst quarter of the pandemic did not surpass. At the same time, the number of companies raising dividends fell from 2,513 in 2007 to 1,191 in 2009.

The cuts affected some of the market’s most reliable payers. For example, General Electric reduced its quarterly dividend from $0.31 to $0.10 per share in February 2009, a step the company said would preserve about $9 billion annually. A two‑thirds reduction of a payout of that size illustrates the depth of the damage.

The recovery unfolded over years, not quarters. Dividend increases across U.S. stocks totaled $26.5 billion in 2010 and $50.2 billion in 2011—an 89% rise, yet still only a partial return to the prior pace. As late as January 2012, S&P projected that the market’s indicated dividend rate would finally exceed its June 2008 level later that year, marking a four‑year round‑trip for payouts that were supposed to be dependable.

Today’s fund isn’t 2007’s

The Schwab fund did not exist during any of that period; it launched in late 2011, almost perfectly timed with the recovery.

It tracks the Dow Jones U.S. Dividend 100 index, which screens for companies with at least ten consecutive years of dividend payments and evaluates financial‑strength metrics such as cash flow relative to debt. A fund constructed this way would likely have avoided many of the era’s worst dividend cutters, although no screen can catch every vulnerability in a deep recession.

The resulting portfolio tilts toward value stocks with long‑standing payout records.

The composition of the yield gap differs today from 2007. Back then, the spread narrowed because the economy collapsed—Treasury yields fell and dividend payouts were slashed. Today, the spread widened because long‑term yields surged, not because equity payouts gave way. The fund’s shares have risen about 27% this year. A yield spike generally pressures growth stocks first, while the challenge to an income fund builds more slowly, as it competes for the same pool of savers.

The lesson is specific. The 2007‑level bond yield was neither a warning nor an all‑clear for dividend stocks. The bond delivered its promised return, rewarding those who held it for several years. What ultimately determined the outcome for income investors was whether the underlying companies could maintain their payouts through a recession.

A 5.3% government‑backed yield presents strong competition for a 3.1% equity yield, marking the highest level the long bond has reached in 19 years. This creates valuation pressure on every income stock, including the fund’s holdings. For investors who own the fund, the key factor to monitor is not the yield spread itself, but the health of the companies behind the dividends.

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