Bond yields are rising as investors fret over inflation and government debt. So why are dividend stocks holding up relatively well?

As you might recall, bond yields – which move in the opposite direction to bond prices – last surged during the postpandemic inflation run-up in 2022 and 2023. The yield on the 10-year U.S. Treasury bond popped above 5 per cent in October of that year, if only briefly.

On Monday, the bond yield did it again, rising above 5 per cent to its highest level since 2007.

Other bond yields are also rising – the yield on the 10-year Government of Canada bond neared 4 per cent on Monday – weighing on diversified fixed-income portfolios.

But here’s the perplexing part of this story: Dividend stocks remain well above their 2023 levels, and yields are low.

Dividend yields and bond yields often move in tandem. That’s because if the government bond market is offering a tantalizing low-risk payout, dividends must compete. Why buy a utility stock yielding 4 per cent if a bond is paying more?

This relationship between bonds and dividends was an especially close one in 2022 and 2023. When bond yields rose to multiyear highs, so did dividend yields – meaning that stock prices were crushed.

In October, 2023, the yield on the iShares S&P/TSX Dividend Aristocrats Index ETF, a proxy for a basket of Canadian stocks with a good track record for raising their dividends at least once per year, rose as high as 4.4 per cent.

Today, the ETF’s yield sits at just over 3 per cent.

This isn’t to suggest that dividend stocks are sailing through the current bond mayhem. They’re not: The S&P/TSX Aristocrats Index has fallen 4.8 per cent since mid-July.

Some particular dividend-heavy sectors have been hit even harder. Utilities are down nearly 12 per cent over the past two months and the Big Six banks are down more than 5 per cent, underperforming the broad S&P/TSX Composite Index.

But these are mere flesh wounds. Stock prices are still up substantially over the longer term, in many cases.

The banks are up 46 per cent over the past year alone, which has driven down the average dividend yield to a level below 3 per cent. Utilities are up 20 per cent since the start of 2025, also pushing down yields.

Perplexed? There are a couple of key differences between the dividend yield environment today and in 2023.

For one, the interest rate environment three years ago was defined by aggressive rate hikes by central banks. The U.S. Federal Reserve raised its key rate seven times in 2022 and four times in 2023, as it wrestled with soaring inflation.

Dividend yields were high as stock prices fell because investors had few inklings as to when central banks would end their rate hikes and what the economic consequences would be.

Today, financial markets expect the Fed to hike rates twice by the end of this year – but not embark upon a lengthy campaign that threatens the economy. This more moderate outlook could be supporting dividend stocks, for now.

Another key difference: Several dividend-heavy sectors are enjoying significant operational tailwinds that might not have been so clear three years ago.

Utilities are benefiting from strong growth in demand for electricity. Banks are coasting on stable economic activity and lower credit losses. Pipelines are poised to benefit from government backing for more energy infrastructure. And even real estate investment trusts (REITs) see improving vacancy rates.

Still, rising bond yields are creating headwinds for dividend stocks. Are you buying the dip or sitting on the sidelines? Let me know at dberman@globeandmail.com.