T-bills vs dividend stocks: what a 4.45% risk-free yield really buys a retiree

By Julia Santos · Founding Editor, DividendsTimes

Educational analysis, not personalized investment advice.

Treasury bills are paying as much as 4.45%, according to 24/7 Wall St., and that one number is why the T-bills vs dividend stocks argument is back on retirees’ kitchen tables. The federal government now pays more than most blue-chip dividend stocks do. If you live on portfolio income, you are entitled to ask why you are still carrying equity risk for a smaller check.

I have an answer, and it is not the diplomatic one. It depends on which kind of income you are buying. A bill sells you a fixed coupon for a few months. A dividend stock sells you a claim on a stream that can grow, gets taxed more gently, and can also be cut. Different products. Retirees get into trouble when they price them as if they were the same thing.

What 4.45% actually buys you

Start with what the bill promises. Put a lump sum into bills at the 4.45% that 24/7 Wall St. cited and you collect exactly that over the year, before tax, with no credit risk and no price swings worth mentioning. The Treasury auctions bills every week, at maturities running from about a month out to a year, so the money is never locked up for long. For someone paying groceries and property tax out of a portfolio, that liquidity is worth real money.

It is also the catch. A bill matures. When it does, you reinvest at whatever the market offers that morning. If the Federal Reserve cuts its policy rate, bill yields usually follow within weeks, because nothing tracks the front of the curve more closely. You rent 4.45%, one maturity at a time. You never own it.

Dividend income runs the other direction. A company paying you a dividend this year owes you nothing next year. But the long-tenured payers have built their whole reputation on raising the check. S&P Dow Jones Indices will not admit a company to its Dividend Aristocrats index without a quarter century of consecutive annual dividend increases, and Coca-Cola (KO), Johnson & Johnson (JNJ) and Procter & Gamble (PG) cleared that bar decades ago.

The growth math retirees underrate

An illustration, not a forecast, and I am leaving the figures out on purpose because the shape matters more than any particular number. Say a stock yields a little less than the bill on your purchase price, and the board raises the dividend every year at a steady clip. Year one, it pays you less than the bill. Keep collecting the raises and the dividend on your original cost eventually passes the bill yield, then keeps climbing. The bill, meanwhile, pays whatever the Treasury market says that year. Could be 4.45% again. Could be a lot less. Could be more. Nobody knows, and anyone who tells you otherwise is selling something.

That is the whole trade. Bills win the first few years with near certainty. Dividend growers win the back half of a long retirement, if the payout growth holds. Someone in their mid-sixties has to plan for both halves, which is why selling everything to buy bills is a lazy answer.

The caveat I will not skip: payout growth is never guaranteed, and dividends get cut in every recession. A steady annual raise rests on the payout ratio, the balance sheet and the business underneath. Coverage matters more than headline yield. Always has.

Tax treatment changes the comparison

The after-tax gap is usually narrower than the headline numbers suggest. Interest on Treasury bills is taxed as ordinary income federally but is exempt from state and local income tax, per the Treasury. Qualified dividends from most US corporations are taxed at the long-term capital gains rates the IRS publishes, which sit below ordinary income rates for nearly every retiree who files a return.

So a retiree whose dividends qualify for the lower rate can hold a stock yielding somewhat less than the bill and still net about the same after federal tax. Live in a high-tax state and the state exemption on bill interest claws some of that back. Pull out last year’s return and run your own numbers. A few minutes with a calculator beats a decade of guessing.

REITs are the exception that matters. Most of what a REIT pays is ordinary income, not qualified, so a REIT yield against a bill yield is close to a fair tax comparison. A Coca-Cola dividend against a bill is not.

What it means for retirees living on dividends

Treat the bill yield as a benchmark, not a sell signal. Any holding yielding less than the bill has to earn its place with growth or a tax edge. Any holding yielding well above it has to earn its place with coverage.

• Check the payout ratio. A company paying out more than it earns in free cash flow is the one that cuts in a downturn. Compare the dividend to free cash flow in the latest quarterly filing, not just to reported net income, which is easier to dress up.
• Separate the near term from the rest. Cash you need in the next few years belongs in bills or a bill ladder. Cash you need after that is where the dividend growers earn their keep.
• Know which holdings are rate-sensitive. Utilities, REITs and preferred stocks trade like long bonds. If the Fed cuts, those prices typically rise and the yield on new purchases falls. Buyers who wait for lower rates may end up paying more for the same income.
• Look at the ETF, not just the stock. The Schwab U.S. Dividend Equity ETF (SCHD) and the Vanguard Dividend Appreciation ETF (VIG) screen for dividend growth and balance-sheet quality. That is the trait that matters most when you are trying to outrun a bill yield.

The retiree most exposed here is the one who piled into high-yield names to beat the bill rate and never checked coverage. Those dividends get cut first. When they are cut, the share price usually goes with them, and you lose the income and the principal in the same quarter.

What to watch

The Federal Reserve’s next scheduled policy meeting sits on its published calendar for the end of this month. A cut would push bill yields down at the weekly auctions that follow, and the shortest maturities will show how fast. Check whether the 4.45% that 24/7 Wall St. cited is still on offer a month from now. I would not bet on it, but that is an opinion, not a forecast.

Third-quarter earnings season is also when many Aristocrats declare the next quarterly dividend. Track whether the size of each raise holds up against last year. A company that raised its payout briskly last year and barely nudged it this year is telling you something about its cash flow, whether or not management says it out loud.

Frequently asked questions

Should a retiree sell dividend stocks to buy T-bills at 4.45%?

Not wholesale. Bills belong in the slice of the portfolio covering the next few years of spending. Selling long-held dividend growers also triggers capital gains tax and gives up a payout that may keep rising. A bill never rises.

Which pays more after tax, a T-bill or a qualified dividend?

It depends on your bracket and your state. Bill interest escapes state tax but is taxed as ordinary federal income. Qualified dividends get the lower long-term capital gains rates the IRS publishes, but most states tax them. Run both on your own return.

What happens to T-bill income if the Fed cuts rates?

Bill yields track the Fed’s policy rate closely, so each maturing bill rolls into a lower yield. A dividend from a company that keeps raising its payout is untouched by the cut, and rate-sensitive stocks such as REITs and utilities may rise in price.

Educational analysis, not personalized investment advice.