Treasury Bond Yields Are Rising…But These Dividend Kings Pay More

2024 was expected to be the year when interest rates would start falling in the first quarter. However, the Federal Reserve is now signaling it is under no economic pressure to cut rates at all while some analysts are even modeling rates to move higher as inflation remains difficult to tame.   

On Tuesday, the yield on the U.S. 10-year Treasury note hit 4.7%, the highest level since November 2023. The rate started the year at 3.9% but has been climbing due to various factors.   

Factors such as hotter-than-expected inflation, robust retail sales, and strong labor market data have led investors to adjust their expectations, accepting that rates might remain elevated for longer. The market now predicts that rate reductions might start in September (if at all), suggesting that high rates could persist through the summer.   

This scenario poses a dilemma for income-focused investors: should they opt for 1) low-risk, high-yield government and corporate bonds, or 2) higher-risk, dividend-paying stocks with potential for growth. While both options are viable for long-term portfolios, the appealing yields offered by bonds are increasingly hard to overlook.   

Nevertheless, the enticing yields on these three ‘Dividend Kings’—companies that have raised their dividends for at least 50 consecutive years—are competing strongly with the 10-year note: 

Altria Group (MO): Yield 9.5% 

Altria Group, known for its cigarette brands like Marlboro and Virginia Slims, has been diversifying its portfolio in response to regulatory pressures and shifting consumer health preferences. This shift has led Altria to acquire companies such as NJOY and make investments in sectors like beer with AB InBev and cannabis with Cronos Group.   

Despite these efforts, the diversification process has been gradual, and Altria’s shares have declined by approximately 11% over the past 12 months. However, this decrease in share price has enhanced the attractiveness of the company’s dividend yield, making it one of the highest in the S&P 500. Income investors who are patient enough to wait for the diversification strategy to bear fruit might appreciate the $3.92 annualized dividend, which has increased annually for 55 consecutive years. 

3M (MMM): Yield 6.6% 

Fellow S&P 500 component and Dividend King member 3M has increased its dividend for 67 consecutive years, marking one of the longest streaks in the index. The global industrial conglomerate has faced challenges recently, missing Wall Street’s revenue forecasts for two consecutive quarters. Legal issues related to its Combat Arms Earplugs and a settlement with Public Water Systems have pressured the stock.   

However, profitability has shown signs of improvement, indicating that management’s strategies for margin enhancement are taking effect. Earlier this month, 3M spun off its healthcare business into a separate publicly traded company, Solventum (SOLV), retaining a 19.9% stake in the new entity.   

With ongoing litigation and a renewed focus on its core industrial and consumer businesses, 3M’s stock has begun to recover. It has risen about 30% from its October 2023 low, and with a still attractive dividend yield, it is regaining favor among income investors. 

Leggett & Platt (LEG) Yield 10.6% 

Furniture, bedding, and flooring specialist Leggett & Platt has been navigating through a challenging three-year downtrend, highlighted by supply chain disruptions, a sluggish housing market, and inflationary pressures impacting consumer spending.   

These factors have led to a 70% decline in the stock from its May 2021 peak. In response to these challenges, management recently revised its 2024 sales growth outlook to a decline of 2% to 8%.   

Despite these setbacks, there are signs of a potential turnaround. In January 2024, Leggett & Platt initiated a restructuring plan aimed at attracting more customers, expanding its product offerings, and enhancing profitability.   

Additionally, the company is pursuing growth through acquisitions of smaller, complementary businesses within the fragmented furniture industry. These strategic moves have prompted analysts to revise the consensus earnings estimate for 2025 upwards.   

While the stock carries significant execution risk, its substantial dividend yield may offer a compelling draw for income-focused investors, making it a potentially rewarding, albeit speculative, opportunity.