Treasury Yields Hit a 24-Year High This Month. Is Vanguard's High-Dividend ETF Still Worth Buying?

The 10-year Treasury yield closed at 5.31% on Oct. 5, its highest close since spring 2002. It has dipped a bit since then, to about 5.1% as I write.

Still, $10,000 put in a 10-year Treasury today would earn about $510 a year for a decade, backed by the U.S. government.

It's strong competition for the Vanguard High Dividend Yield ETF (NYSEMKT:VYM), which trades around $160 as I write. Last month, I chose this fund as the income part of a three-fund Vanguard portfolio I'd be glad to own for 20 years, along with an S&P 500 (SNPINDEX:^GSPC) fund and a growth stock fund. The 10-year yielded about 4.75% at the end of August. Now it pays over double what the dividend fund does.

With around 5% available from the government, is the fund still worth buying? I think it is. But the reason to hold it has little to do with its yield today.

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A bigger check from the Treasury

Vanguard puts the fund's SEC yield (a standardized measure of the income its stocks produced over the past 30 days, after expenses) at 2.35% for the period ending Sept. 30. On $10,000, that's around $235 a year in dividends, under half of the Treasury's $510.

And the Treasury's interest is fixed. Keep the note until it matures, and the payment doesn't change for 10 years. Then the $10,000 comes back.

The fund makes no promise like that.

It holds 593 U.S. stocks with above-average dividends, a mix that tilts toward value stocks. And it passes on what they pay, minus its 0.04% expense ratio.

When these companies cut their dividends, the fund's payout shrinks with them. This happened in the financial crisis, when the fund's annual payout slid from around $1.44 a share in 2008 to about $1.09 in 2010, down around 24%.

For an investor who needs the biggest, most reliable income stream starting now, the Treasury is arguably the better option today. It isn't very close.

A growing payout

What the fund's dividend stocks offer instead is a payout that tends to rise over time.

The fund's yearly payout climbed from around $2.15 a share in 2015 to about $3.50 in 2025, an average gain of around 5% a year. But the growth hasn't been steady. From 2023 through 2025, the payout barely moved, rising less than 1% overall. Growth has accelerated again in 2026, though. Each of the fund's three payments so far this year, the latest around $0.89 a share on Sept. 22, has topped the matching payment in 2025, and together they're up around 7%.

Of course, 5% growth takes time to bridge a gap this big. If the payout keeps rising at this rate, the dividends from $10,000 invested now wouldn't match the Treasury's roughly $510 a year for about 16 years.

But income is just part of the case for owning the fund. Its share price can climb too, as the companies it holds grow their earnings.

Counting both dividends and price gains, Vanguard lists an average annual total return of around 11% for the decade ended Sept. 30 -- far above what the Treasury pays today.

Sure, there's no guarantee that continues. The fund dropped nearly 5% in September alone, while a Treasury held to maturity pays back every dollar. But the note can't return more than its yield, and its interest never grows.

Who should own which?

For investors who spend their income now, like a retiree covering monthly bills, a 10-year Treasury at around 5.1% pays more today. And if the fund's payout keeps growing at its 10-year rate, the Treasury would probably pay more every year of the next decade, too. Even better for that investor, its income can't be cut.

The fund fits a different investor. It's made for somebody who can reinvest the dividends, or just leave them alone, for many years and wants that income to grow.

That's the job I gave it last month, as an income tilt beside a broad S&P 500 index fund. Even in August, the Treasury out-yielded it by a big margin. Winning on current income was never the fund's role in that portfolio.

In the end, a 5% Treasury doesn't change that job. I'd still buy the fund at around $160 in that role. I just wouldn't buy it expecting to beat a 5% Treasury on income, because for at least the next decade, it likely won't.

Daniel Sparks and his clients do not have positions in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard High Dividend Yield ETF. The Motley Fool has a disclosure policy.