Kroger Can't Compete With 30-Year U.S. Treasury Bonds on Yield Alone. Here's Why the Dividend Stock Is Still a Better Buy for Long-Term Investors.

It's a fantastic time to be an income investor. The recent rise in interest rates has opened up opportunities well beyond the market's favorite dividend stocks.

Namely, interest rates on bonds are now higher than the dividend yields offered by a bunch of dividend-paying tickers. Indeed, yields on 30-year Treasuries have improved from 2024's low near 4% to their current multiyear high of just less than 5.3%, giving investors something to think about that they haven't needed to consider in a while.

Even so, a much-lower-yielding stake in grocery giant Kroger (NYSE: KR) could still be a better choice for true long-term income-seekers. Here's why.

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Kroger, by the numbers

As far as income stocks go, you can certainly find what seems to be a better option. Kroger's forward-looking dividend yield currently stands at only 2.6%, or roughly half of what you'd be getting by owning a 30-year Treasury issued and guaranteed by the United States government.

Kroger may be one of the market's best-kept income-generating secrets, however, despite its relatively low yield.

See, Kroger shares offer something that bonds don't. That's payment growth. A lot of it. Over the course of past 10 years, the grocer's quarterly per-share payment has grown from $0.12 to $0.39. That's an average annualized increase of 12.5%, making it one of the fastest-growing dividends among all stocks for the era.

Granted, stock buybacks helped -- dramatically. The company's total outstanding share count has been reduced by roughly one-third during this timeframe, while EBITDA didn't quite double, and profits have remained relatively flat. It just doesn't matter. The point is, the company has been able to grow its dividend payment at this amazing pace. And, it remains in a position to continue growing its dividend payments at a pace that looks like its recent past. That's in stark contrast to interest payments on bonds, which don't grow no matter how long you hold them.

Or think about it like this: Ten years from now, the yield you'd be getting on the purchase of a 30-year Treasury today would still be 5.3%. Assuming its past dividend growth persists into the future, however, in 10 years' time the 2.6% dividend yield you'd be plugging into with a new position in Kroger could grow into an effective yield of nearly 8% on your initial investment. Plus, unlike bonds, your stake in Kroger at least has a shot at offering you some capital appreciation in the meantime.

Think bigger-picture

This math doesn't inherently mean everyone should opt for a new position in Kroger shares instead of a 30-year Treasury (or any other government-backed bond). Government-issued debt is ultra-safe, guaranteed by that government's ability to print money, if need be. Owning equity in publicly traded offers no such guarantee. And, Kroger's impressive dividend growth only matters if you're willing and able to stick with it for the long haul. If you're only looking to earn some decent interest on your money while it's temporarily on the sidelines, so to speak, bonds are arguably a better bet for you.

Just make sure you're doing this sort of bigger-picture thinking before diving into anything in this higher-rate environment. There's always more to the story than just today's yield.

James Brumley has no position in any of the stocks mentioned. The Motley Fool recommends Kroger. The Motley Fool has a disclosure policy.