With the 10-year Treasury yield approaching 5 percent, income-oriented investors face a serious choice: lock in a high government-guaranteed return or invest in utility stocks through the Vanguard Utilities ETF.
VPU is a useful comparison because utilities are often treated as bond substitutes. Utility companies typically pay relatively high dividends and generate comparatively stable revenue, but investors also assume equity risk and the concentrated risks of a single industry, including regulation, capital-intensive expansion and sensitivity to interest rates.
As of September 10, VPU closed at approximately $184.01 per share. Its annual distribution was about $5.17 per share, producing a dividend yield of approximately 2.8 percent. The 10-year Treasury yielded approximately 4.93 percent.
Suppose an investor places $10,000 in each investment and holds it for ten years. VPU dividends are reinvested annually. To create a fixed Treasury benchmark, assume the investor purchases a 10-year zero-coupon Treasury yielding 4.93 percent. Unlike a conventional Treasury note, the zero-coupon security makes no interim interest payments and therefore eliminates the need to assume that coupons can be reinvested at the original yield. Also assume that VPU maintains its current 2.8 percent dividend yield, meaning that its dividend per share grows at the same rate as its share price.
The $10,000 Treasury investment grows to approximately $16,181 after ten years.
The critical question is how rapidly VPU must appreciate to reach the same amount.
The Break-Even Case
If VPU’s share price appreciates by approximately 2.1 percent annually, and its dividend grows at the same rate, the $10,000 investment also grows to approximately $16,181.
VPU’s share price would rise from approximately $184 to about $226 after ten years. Its annual dividend would rise from $5.17 to approximately $6.36 per share. Because the dividends are reinvested, the investor would also own more shares at the end of the period.
If VPU maintains a dividend yield near 2.8 percent, annual share-price and dividend growth of approximately 2.1 percent allows it to match a 10-year Treasury yielding 4.93 percent.
Growth above that rate produces a VPU victory. Growth below it produces a Treasury victory.
The Higher Growth Case
Suppose VPU’s share price and dividend both grow by 4 percent annually.
After ten years, VPU’s share price would rise from approximately $184 to about $272. Its annual dividend would increase from $5.17 to approximately $7.65 per share.
With dividends reinvested, the original $10,000 grows to approximately $19,529. That is about $3,348 more than the Treasury’s $16,181.
This outcome does not require spectacular stock-market performance. It requires utilities to deliver moderate, sustained growth while maintaining their current dividend yield. But it is not guaranteed. Higher interest rates, heavy capital requirements, regulatory decisions or disappointing electricity demand could hold down utility valuations and earnings.
The Lower Growth Case
Now suppose VPU’s share price and dividend grow by only 1 percent annually.
After ten years, the share price would rise from approximately $184 to about $203, while the annual dividend would increase from $5.17 to approximately $5.71 per share.
With dividends reinvested, the $10,000 investment grows to approximately $14,573. The Treasury finishes at $16,181, approximately $1,608 ahead.
VPU would still have produced positive income and capital appreciation. It would simply have failed to generate enough growth to overcome the Treasury’s much higher starting yield.
The Choice
The 10-year zero-coupon Treasury offers greater certainty. If held to maturity, its ending value is fixed at purchase and does not depend on future reinvestment rates. By contrast, both VPU’s dividends and its ending share price remain uncertain.
The Treasury’s certainty applies only if it is held to maturity. If interest rates rise after purchase, the market value of the zero-coupon Treasury will fall, potentially substantially, while VPU could also decline because higher rates make its dividend less attractive and raise utilities’ financing costs. An investor who may need to sell before the end of ten years therefore faces interest-rate risk with either investment.
VPU offers less certainty but greater potential. Its current dividend yield is substantially below the Treasury yield, so it needs capital appreciation and dividend growth to close the gap. If both grow by more than approximately 2.1 percent annually, VPU wins. If they grow by less, the Treasury wins.
For an investor who needs a known amount of money in ten years, the Treasury has the stronger claim. For an investor who can tolerate fluctuating prices and expects utilities to produce sustained growth above 2.1 percent, VPU may be the better investment.
At today’s yields, choosing between them is essentially a judgment about whether utilities can produce more than 2.1 percent annual growth in their share prices and dividends over the next decade.
The Treasury’s certainty applies only if it is held to maturity. If interest rates rise after purchase, the market value of the zero-coupon Treasury will fall, potentially substantially, while VPU could also decline because higher rates make its dividend less attractive and raise utilities’ financing costs. An investor who may need to sell before the end of ten years therefore faces interest-rate risk with either investment.
Appendix Calculation Documentation
This appendix documents the model, reproduces the numerical results, and shows why the 2.1 percent break-even estimate is valid under the stated assumptions. Using unrounded inputs, the exact break-even annual growth rate is 2.0624 percent, which the article rounds to 2.1 percent.
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