Back when yields on the 10-year U.S. Treasury were below 2%, buying stocks with higher dividend yields than the S&P 500 was a popular trade. As interest rates have risen, though, that trade has quickly reversed. Suddenly investors are looking at their portfolios, scratching their heads and asking themselves, "Why did I buy that stock again?"
The chart below compares the current yield on the 10-year U.S. Treasury (2.57%) to the individual dividend yield of each stock in the S&P 500. At current levels, 165 stocks (33%) in the S&P 500 have a dividend yield that is greater than the yield on the 10-year. At the end of Q1, however, more than half of the index (257 stocks) had a higher dividend yield than the 10-year (1.85%). In other words, over the course of less than three months, 92 S&P 500 stocks have seen their dividend yields flip from more attractive than the 10-year to less attractive. Furthermore, if the yield on the 10-year touches 3%, only 110 stocks in the S&P 500 -- or less than a quarter of the index -- will have a higher yield than the 10-year U.S. Treasury.
Buying stocks for their dividend yield is by all means a viable investment strategy, but just keep in mind that it should not be the only factor used in your analysis. If, or when, interest rates rise, will you be as happy holding that stock than you were when you originally purchased it?