By Paul R. La Monica

Dividend-paying stocks benefited from investors' flight to safety earlier this year as trade war fears dominated the market. But now that worries about tariffs are fading, these stocks don't look quite as attractive -- especially as long-term bond yields have started to rise again.

The SPDR S&P Dividend exchange-traded fund, while still up nearly 4% in the past month, has lagged behind the broader market during that stretch. The S&P 500 has gained more than 9%. What's more, the yield on the U.S. 10-year Treasury note is now hovering just below 4.5%, making bonds once again a good option for investors seeking higher yields.

"Bonds offer a safe and steady stream of income. They are still attractive for the long-term," said Dan Carter, a managing director and senior portfolio manager with Fort Washington Investment Advisors in an interview with Barron's.

"Dividend stocks may have high yields, but they are still subject to downside if the economy rolls over. I wouldn't consider them good substitutes for bonds," Carter added.

Investors should also realize that some of the sectors that offer big dividend yields -- such as consumer staples companies, telecoms, utilities, healthcare, and real estate investment trusts (REITs) -- may not have much in the way of earnings growth potential.

With the market once again embracing risk, Dow Jones Industrial Average components Coca-Cola, Verizon and Johnson & Johnson are all in red for the past month, while the Dow is up more than 4%. The Utilities Select Sector SPDR and Real Estate Select SPDR ETFs have also lagged behind the S&P 500's gain since mid-April.

"Chasing dividend yields can be dangerous," said Scott Clemons, chief investment strategist with Brown Brothers Harriman at a media event in New York Tuesday morning. Bonds, particularly tax-free municipal bonds, are a better option for investors looking for income, he added.

Buying a stock just for its dividend may be a recipe for long-term underperformance as well. The SPDR S&P Dividend ETF, which has big weightings in Verizon, REIT Realty Income, and utility Consolidated Edison, has had a 9.2% annualized return over the past 10 years, compared with 12.8% for the S&P 500 during the same period.

That isn't to say that investors should ignore dividends entirely. It is nice to see companies use cash to reward shareholders with quarterly checks, particularly if investors take that money and reinvest it. The key, though, is to look for companies with a history of steadily increasing their dividend payments, not necessarily a high yield.

"There is growth available in the right dividend-paying stocks. It's all about how you curate your portfolio," said Bob Kalman, co-founder and senior portfolio manager at Miramar Capital. Kalman said his firm owns tech companies Apple, Microsoft, Broadcom, and Qualcomm, as well as Paychex, JPMorgan Chase, CME, and Waste Management.

These stocks, Kalman said, have the benefit of stronger earnings prospects, as well as the stability of a dividend. It's the proverbial case of having your cake and eating it too. Investors shouldn't have to choose income over growth when they can have both.

Write to Paul R. La Monica at paul.lamonica@barrons.com

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May 13, 2025 13:58 ET (17:58 GMT)

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