Investors today could be forgiven for feeling as though they're back in driver's education class, because they're sure hearing a lot about yield these days. While the average dividend yield on the S&P 500 is hovering around 1.1%, it hit an all-time low of 1.04% last month. Conversely, yields on 10-year Treasuries briefly nudged above 5% this month before retreating modestly.
As of Friday midday, they were at almost precisely 5%. The point is that stock prices are rising, forcing their dividend yields down, while bond prices are faltering, boosting those securities' yields in the process. Act 2 Could Be 15x Bigger.
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Continue » Market participants looking for a middle ground between high Treasury yields and the barely visible yield on the S&P 500 have a few options to consider, including such familiar fare as Coca-Cola (NYSE: KO). Coca-Cola has maintained a 65-year streak of annual payout hikes, making it a Dividend King -- one of just a few dozen companies that have raised dividends for 50 consecutive years or more. That's an interesting historical footnote, and one that's not lost on the company, which takes yearly payout increases quite seriously.
But in yield terms, Coca-Cola is in fact "Goldilocks," and that's a good thing. Obviously, Coke's 2.5% dividend yield puts the S&P 500 to shame, but in context, it's also attractive compared to nearly 5% yields on 10-year Treasuries. First, although it's one of the largest consumer staples companies by market cap, implying it's a defensive stock (it is), Coke offers more long-term appreciation potential than U.S. government bonds.
Second, the Federal Reserve may have one more federal funds rate hike left in its pocket this year. Expectations of further tightening could weigh on Treasury prices, sending yields higher. If that happens, investors who like 10-year Treasuries at nearly 5% may be forced to fall in love at north of that percentage.
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