Dividends Can Be Cut. A 1-Year Treasury Bill Yielding 4.38% Cannot

As of Sept. 22, Treasury bill investment yield averages ran 3.88% at four weeks, 3.94% at six weeks, 3.99% at eight weeks, 4.11% at 13 weeks, 4.18% at 17 weeks, 4.30% at 26 weeks and 4.40% at 52 weeks.

The one-year Treasury par yield at 4.40% is the number an income investor now has to beat, cleanly, to justify holding a dividend stock instead of a bill. This column will run every month and rotate the competing instrument. The launch edition takes the Treasury bill.

What a Treasury Bill Actually Is

A Treasury bill is a short-term IOU from the United States federal government. Bills are issued at four-, six-, eight-, 13-, 17-, 26- and 52-week maturities, and they are sold at a discount to face value. There is no periodic coupon check. You pay less than $100 per $100 of face, and at maturity the Treasury pays you the full face amount. The difference is your interest, and the annualized version of that difference is what the tables quote as the investment yield. On Sept. 22, that 52-week investment yield averaged 4.40%.

An ordinary saver can buy bills two ways: Either directly from the government at TreasuryDirect.gov in $100 increments, or through a brokerage account, which is how most people do it. In either case, the price is set by auction. Primary dealers and other bidders submit what they are willing to pay, and the auction clears at a single rate. Retail buyers who submit a non-competitive bid accept whatever rate the auction produces. That is why the rate on next week’s bill is not the rate on this week’s bill. Each auction resets.

At maturity, the money lands back in your account. If you want to stay invested, you buy the next bill at the next auction, at whatever rate that auction clears. That is reinvestment risk, and it is real. A 4.40% one-year yield today does not guarantee a 4.40% one-year yield when the bill matures. If you sell a bill before maturity in the secondary market, you take price risk as well, because bill prices move inversely with prevailing rates. Held to maturity, a bill pays what the auction locked in, backed by the full faith and credit of the U.S. Treasury. That backing is a credit guarantee. It is not a promise about future rates and not a promise about inflation.

One thing to notice in the current curve: the shorter the maturity, the lower the yield. The four-week investment yield averaged 3.88% on Sept. 22, against 4.40% at 52 weeks. Investors are paid more to commit money for longer because they give up flexibility and take on more uncertainty over the holding period. That is the plain reason, and it says nothing about where rates go next.

Bills Versus Dividend Income, Both Halves Plainly

Here is the trade in a sentence: a Treasury coupon cannot be cut, and a dividend can. That is the case for the bill. The Treasury will pay the face amount at maturity regardless of the economy, the stock market, or the payer’s earnings. A dividend, by contrast, is a decision the board of a company makes every quarter. Recessions, refinancings, capex bursts, and legal settlements have all forced dividend cuts on companies that looked bulletproof beforehand. If income certainty over the next twelve months is the point, a one-year bill answering 4.40% on the par curve as of September 17, 2026 is a hard yardstick.

Now the other half. A dividend can grow, and a fixed coupon cannot. A quality dividend payer that raises its payout every year gives an investor a rising income stream and, over long holding periods, the potential for capital appreciation as well. A Treasury bill offers neither. It matures, and the rate on the next bill is the rate the next auction hands you. It could be higher. It could be lower. There is also no maturity date on a share of stock; the position keeps compounding for as long as the investor holds it and the company keeps paying.

Neither half wins the argument by itself. The relevant questions are whether the dividend is safe, how long the investor needs the income to last, and how much rate uncertainty the investor is willing to eat at each rollover. Dividend safety leads. A higher yield is not a better deal if the payment is at risk (we put the seven warning signs that a big yield is about to be cut in a free report here: Dividend Traps).

For context on where the guaranteed side sits versus other savings options: the FDIC national average 12-month CD rate was 1.71% as of Aug. 1, which is a bank average and not the best rate available. FDIC insurance covers deposits up to the standard limit of $250,000 per depositor, per insured bank, per ownership category. The federal funds target upper bound stood at 4% on Sept. 18, which is the policy-rate anchor behind short-term Treasury yields. And Series I savings bonds carry a composite rate of 4.26% for the earning period May 1 through Oct. 31, built from a 0.90% fixed rate and a 1.67% semiannual inflation rate. Each of those instruments will get its own edition.

Tax Treatment, Which Frequently Decides It

Treasury bill interest is taxable at the federal level as ordinary income. It is exempt from state and local income taxes. For a saver in a state with a high income tax burden, that state exemption is not a rounding error. The weighted state and local tax burden ran to $10,828 per capita in New York and $10,006 in Hawaii in 2024, while Florida came in at $5,110, Tennessee at $5,333, and South Dakota at $5,041, reflecting the absence of a broad state individual income tax in several of the lowest-burden states. Treasury interest lands the same way for the federal return in every state, but the after-tax figure a New York or California resident keeps looks different from what a Florida or Texas resident keeps.

Dividends work differently. Qualified dividends from U.S. corporations held for the required holding period are taxed at long-term capital gains rates at the federal level, which for many investors is lower than the ordinary-income rate applied to bill interest. But qualified dividends are generally taxable by the state as well, with no Treasury-style state exemption. Non-qualified dividends, including most REIT distributions and many payments from pass-through structures, are taxed as ordinary income at both levels. A headline yield comparison ignores the wrapper, and the wrapper often changes the answer.

Two more items retirees should know. First, both Treasury interest and dividend income can raise the taxable portion of Social Security benefits, so the marginal cost of a dollar of investment income can be higher than the stated tax bracket suggests. Second, in a traditional IRA or 401(k), the state-tax advantage of Treasury interest and the qualified-dividend rate on dividends both disappear, because withdrawals come out as ordinary income regardless.

Who Each Option Suits

A one-year Treasury bill at a 4.40% investment yield as of Sept. 22 suits the saver who needs a defined dollar amount in twelve months, who cannot tolerate a cut to that payment, and who lives in a high-tax state where the state exemption matters. It also suits investors staging cash for a known outlay, and retirees building a short bill ladder to cover near-term spending. A dividend-paying stock suits the investor with a longer horizon, the tolerance to sit through price drawdowns and the occasional payout cut, and the appetite for an income stream that can grow. Neither instrument is the right answer for the other’s job.

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