CDs vs. Dividend Stocks: The Income Gap Could Be Bigger Than Retirees Think

The FDIC’s national average annual percentage yield (APY) on a 12-month certificate of deposit was 1.73% in its September 1, 2026 reading. That is the latest figure available as of October 9, 2026, and the highest reading of the past year. The six dividend payers in this edition have yields ranging from 0.9% to 6.14% as of October 9, 2026. A yield measures income. A higher yield is only worth having if the company continues paying it.

What a CD Locks In and What It Locks Out

A certificate of deposit is a time deposit at a bank. You commit a set amount for a fixed term, such as 12 months, at a fixed APY. If you need the money back early, the bank charges an early-withdrawal penalty, which usually means giving up some of the interest. When the CD matures, you get your principal back, and the bank offers whatever rate it is paying that day if you renew.

The rate on a CD you already hold cannot fall, and it cannot rise. The national average shows why this cuts both ways. It was 1.68% on October 1, 2025, dropped to a 1.52% low on March 1, 2026, then rose back to 1.73%. A saver who rolled a one-year CD in early 2026 renewed at a lower rate. Anyone living on CD income faces reinvestment risk as the main exposure: the rate you have now is only guaranteed until maturity.

Policy rates are moving too. The Federal Reserve’s target-range upper bound was 3.75% from December 10, 2025 through September 16, 2026. It moved up to 4.00% on September 17, 2026 and was still there as of October 9, 2026. CD rates tend to follow that direction over time, so a rate offered at renewal may be higher or lower than the one you have now. The national average is also a floor for shopping.

A CD carries less risk than a stock, but it still carries risk. FDIC insurance covers deposits up to $250,000 per depositor, per insured bank, for each account ownership category. Money above that limit at a single bank is uninsured, and only FDIC-member banks provide the protection. Inflation can eat into a fixed rate over the term. Brokered CDs held through a brokerage account also carry price risk: selling one before maturity on the secondary market after rates have risen can mean selling it for less than face value.

A CD Rate Can’t Be Cut, but It Can’t Grow Either

A CD rate cannot be cut once you lock it in. A dividend can. A dividend can also grow every year, and a fixed CD rate cannot. Any comparison should start with dividend safety, because a cut cancels out the yield advantage.

Safety First: Where the Cut Risk Sits

Pfizer has the highest yield in the group, and that high yield is a warning sign. The quarterly payment has been stuck at $0.43 through every 2025 and 2026 payment. Trailing GAAP EPS of $0.76 falls short of the $1.72 annual dividend. Second-quarter GAAP net income was -$248M, dragged down by a $3.8B impairment. Adjusted EPS guidance of $2.80–3.00 does cover the payout. Management has also ruled out share buybacks in 2026 to pay down debt. The market is pricing in the patent cliff and the drop-off in COVID product sales. Paxlovid revenue fell 95%. Pfizer shows what can happen to a CD-like income stream from a stock: the dividend stops growing first, and a cut is the risk beyond that.

Merck needs a closer look. Its fiscal 2026 non-GAAP EPS guidance of $2.66–2.76 is below the $3.40 annualized dividend. That guidance includes a one-time $2.31/share charge tied to the $5.7B Terns Pharmaceuticals deal, and revenue guidance was raised to $66.3–67.3B. The longer-term question is Keytruda losing patent protection later this decade.

U.S. Bancorp sells CDs at its branches, so a retiree can choose between the bank’s fixed deposit rate and its variable dividend. Credit quality is improving: the net charge-off ratio fell to 0.53% from 0.59%, and net interest margin widened to 2.79%. Bank dividends depend on regulatory capital, though, and the stock fell 8.26% between September 8 and October 9, 2026. CD principal does not swing like that.

Southern Company is the closest thing to a bond in the group. Its earnings come from regulated utilities, and commercial electricity sales rose 7.3% on demand from data centers. The weak spot is Southern Power, which faces about $205M in additional accelerated depreciation charges for the rest of 2026.

Growth: Where a Dividend Can Outrun a Fixed Rate

McDonald’s shows the other side of the trade. Its quarterly dividend rose from $0.375 in 2008 to $1.93 now, with increases along the way. A CD bought in 2008 and rolled ever since would have paid whatever each renewal offered, with no built-in raise. The cost of that growth is price risk: McDonald’s shares were recently hovering near a 52-week low, and global comparable sales growth slowed to 1.3%.

Walmart yields less than the national average CD rate today. It raises its dividend every year, most recently to $0.2475 a quarter, and it raised its fiscal 2027 adjusted EPS guidance to $2.80–2.87. Walmart fits an investor who wants income that grows over time more than income today.

Price swings apply to every stock in the table. Pfizer is up 18.96% year to date but down 13.49% over five years. A shareholder collecting the dividend over that period still had less principal than at the start.

Taxes Can Settle the Question

CD interest faces ordinary income tax at your federal rate and generally by your state as well. The bank reports it on Form 1099-INT. Under IRS rules, you generally include this interest in your income when you actually receive it or are entitled to receive it without paying a substantial penalty. That rule also covers CDs that mature in one year or less and pay all their interest at maturity. On multi-year CDs, you may owe tax on interest each year before the CD matures.

The lower long-term capital gains rates apply to qualified dividends. You must hold the stock more than 60 days in the 121-day period that begins 60 days before the ex-dividend date to qualify. All six stocks here are U.S. corporations whose regular dividends generally qualify, U.S. Bancorp included. Payments that credit unions and savings institutions call “dividends” are a different matter: the IRS treats those as interest income on Form 1099-INT. Most states tax dividends at ordinary rates, so the tax advantage is mainly federal.

For retirees, both CD interest and dividends count toward the income that determines how much Social Security income gets taxed. CD interest is fully taxable on top of that, which can push more of a retiree’s Social Security benefits into the taxable zone. For IRA or 401(k) accounts, these rules do not apply. Withdrawals from a tax-deferred retirement account are taxed as ordinary income either way, so the dividend tax advantage only matters in a taxable brokerage account.

Who Each Option Suits

A CD suits retirees needing a known dollar amount over a set period, such as a planned expense or a cash reserve, who cannot accept any drop in principal. That retiree also has to accept a renewal rate that may be lower. Dividend stocks such as McDonald’s, Southern Company or Walmart fits a retiree with a longer horizon and a taxable account, who wants income that can grow and can tolerate volatility and the chance of a cut. The highest yield in the group, Pfizer’s, comes with the weakest earnings coverage of its dividend.

Either way, the harder question is how to turn a lump sum into something that acts like a paycheck. The mix, the payment calendar, and the withdrawal order are detailed in a free guide to the Paycheck Portfolio Method.

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