Treasury Yields Hit 24-Year High: Is Vanguard's High-Dividend ETF Still a Buy?
Yahoo Finance ·
The 10-year Treasury yield climbed to 5.31 percent on October 5, marking its highest closing level since the spring of 2002. Although it has since moderated to roughly 5.1 percent, investing 10,000 dollars in a 10-year Treasury note now generates approximately 510 dollars annually for a decade, fully backed by the United States government. This risk-free return poses fierce competition for the Vanguard High Dividend Yield ETF, ticker VYM, which currently trades near 160 dollars. Last month, this fund was selected as the income generator within a long-term three-fund Vanguard portfolio alongside an S&P 500 fund and a growth stock fund. With the 10-year yield at the end of August sitting at about 4.75 percent, government debt now delivers more than double the payout of the dividend fund. Even with government yields near 5 percent, the ETF remains a worthwhile purchase, though the justification for holding it extends far beyond its current yield.
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The US 10-year Treasury yield hit 5.31%, reaching a 24-year high. This means that risk-free Treasury bonds have emerged as strong competitors to traditional income assets such as high-dividend ETFs. Investors must reassess their asset allocation strategies in the rising bond yield environment.
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- Bonds — The 10-year Treasury yield surged to 5.31%, putting downward pressure on existing bond prices and causing a yield inversion with newly issued bonds.
- Growth Stocks — As the risk-free Treasury yield exceeds 5%, the present value of future cash flows decreases, acting as downward pressure on the valuations of growth stocks.
- Real Estate — As financing costs rise and the outflow of funds toward Treasuries intensifies, the investment attractiveness and capital influx of the real estate market are significantly dampened.
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As the 10-year Treasury yield exceeds 5.1%, funds seeking guaranteed high returns may move into Treasuries, relatively diluting the attractiveness of equity-based dividend products. Vanguard High Dividend Yield ETF and others may lose ground in short-term dividend yield competition, but they still hold value in terms of long-term capital gains.
The bullish scenario is entering a capital rally for dividend stocks after the peak in interest rates, while the bearish scenario is valuation pressure across the stock market due to prolonged high interest rates. Key monitoring indicators are the Federal Reserve's benchmark interest rate path and the trend of the 10-year Treasury yield.
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