Coca-Cola Loses to 30-year U.S. Treasury Bonds on Yield. Here's Why It Wins on Everything Else.

If you are looking for yield today, rising interest rates have increased your options. For example, the 30-year Treasury bond's yield is around 5.3% as of this writing. By comparison, the S&P 500 index (SNPINDEX: ^GSPC) is only yielding around 1%. But there are still two big reasons why investors may want to buy a high-yield dividend stock like Coca-Cola (NYSE: KO), even though its 2.4% yield isn't even close to the 30-year Treasury yield.

A 30-year Treasury locks you in

A bond is an agreement between the lender and the borrower. The lender provides a fixed amount of cash, while the borrower pays interest at a fixed rate until the loan matures. When the loan matures, the borrower repays the bond's principal. Everything is fixed, and both the value of the interest collected and the bond's principal are slowly eroded by inflation. It doesn't matter that 30-year Treasuries are considered safe because they are backed by the U.S. government. The big inflation risk is still the same.

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If you have a short investment time horizon, inflation may not be a big issue for you. In which case, the 5.3% yield of a 30-year Treasury would probably be more attractive than Coca-Cola's 2.4% yield. However, if you have a long time horizon, Coca-Cola's yield comes with something that a Treasury doesn't: Growth.

Coca-Cola is one of the world's largest consumer staples companies. It has an incredible history of growth, highlighted by 64 annual dividend increases. That makes the company a Dividend King. But think about that for a second, you can collect 30 years of the same income from a bond or 30 years of increasing income from Coca-Cola. Since the start of 1996, roughly 30 years ago, the company's dividend has increased by nearly 750%. That dividend growth was driven by the company's growth, which also led to an over 300% increase in the stock price. If you hold a bond to maturity, all you get back is the principal.

Long-term investors should stick with Coca-Cola

If your investment horizon spans decades, you need to think carefully about how inflation will impact your income investments. Bonds may start with higher yields than Coca-Cola, but at the end of the day, Coca-Cola's strong business and dividend history suggest it will be the better income investment for most income-focused investors. Don't get so caught up in the 30-year Treasury yield that you overlook how Dividend King Coca-Cola's long-term growth can offset inflation's insidious impact.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.