$10,000 in 10-Year Treasuries vs. $10,000 in SCHD -- Which Pays More Passive Income By 2036?

The 10-year Treasury yield recently hit its highest level in 24 years at 5.3%. That high yield has income-seeking investors wondering whether to load up on Treasuries while they're at a historically high level.

Here's a look at how much passive income you can generate over the next 10 years on Treasury bonds compared to another popular income-focused investment: the Schwab U.S. Dividend Equity ETF (NYSEMKT:SCHD).

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A decade-long passive income stream

A 10-year Treasury bond is a fixed-income investment backed by the full faith and credit of the U.S. government. It's a global financial benchmark that influences the rates of almost all consumer and corporate credit, including mortgages.

Its rate has risen from a low of less than 4% right before the war with Iran began to over 5.3% due to elevated inflation, widening Federal deficits, and a debt-fueled boom in AI infrastructure investment. At the current rate, a $10,000 investment in newly issued 10-year Treasuries would generate $530 in interest income each year. Investors can bank on receiving this fixed rate every year through 2036 when the bonds mature. For perspective, if you bought $10,000 in 10-year Treasuries right before the war, they'd only generate about $400 of interest income annually for a decade.

Less income now, but potentially more in 10 years

The Schwab U.S. Dividend Equity ETF is a completely different type of income investment. The exchange-traded fund tracks an index (Dow Jones U.S. Dividend 100 Index) that measures the performance of 100 top high-yield dividend stocks. That index screens companies for several dividend quality characteristics, including current yield, five-year dividend growth rate, and financial strength.

The ETF's trailing 12-month distribution yield is 3%. This means that a $10,000 investment in SCHD would generate about $300 in dividend income over the next year, if it maintains its current dividend rate.

However, since dividend growth is one of the traits the index screens for, SCHD has historically increased its distribution each year. Over the last decade, the ETF has grown its distribution at more than 10% annually. Here's a look at how much dividend income you'd collect in 2036 if the ETF maintained a 10% dividend growth rate:

Image source: Author's chart and calculations.

As that chart shows, by 2036, SCHD would generate over $700 in annual dividend income, 33% more than the 10-year Treasury investment. This projection doesn't assume dividend reinvestment, which would only add to the income growth over the years.

However, there are a few things to keep in mind. There's no guarantee SCHD will continue to hold investments that support 10% annual dividend growth over the next decade. Meanwhile, even if it did, you'd still collect more cumulative income over the next decade with a 10-year Treasury investment ($5,300) than SCHD (~$4,780). On the other hand, after 10 years, you'd have to reinvest your maturing Treasury investment at the prevailing rate, which could be much lower than 5.3%, while your SCHD investment would likely continue to pay rising dividend income.

A guaranteed return versus growth

The 10-year Treasury is currently offering its highest fixed return in nearly a quarter-century, making it appealing for those seeking a guaranteed income stream. While SCHD currently has a lower starting yield, its annual income could surpass the 10-year rate in about seven years, though that growth comes with no guarantee. You'd need to decide which investment meets your risk tolerance and income needs.

Matt DiLallo has positions in Schwab U.S. Dividend Equity ETF. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.