Treasury bonds are yielding the same as the highest dividends paid by S&P 500 companies, Goldman Sachs says

• The yield on the 10-year Treasury is now about same as the highest dividends paid by S&P 500 firms.
• Bond yields have surged as investors fret over higher-for-longer interest rates.

The biggest yield paid by S&P 500 firms can't top the yield on the humble 10-year Treasury note .

In a note on Friday, Goldman Sachs analysts said the difference between the yield of the top 20% of S&P 500 dividend payers and the yield on the 10-year US Treasury has narrowed completely, from one percentage point in May to zero this week.

Getting similar yield for comparatively much less risk has led investors to pull cash from dividend stock funds at an faster pace than cash is flowing out of the overall stock market. Outflows from US equity dividend funds have more than doubled that of the broader market so far this year, according to Goldman Sachs data.

Meanwhile, strategists expect S&P 500 dividend growth to shrink over the next year, down from 5% this year to 4% in 2024.

That's partly due to sluggish corporate earnings this year as well as the lack of "dividend paying capacity" in the real estate and financial sectors, the bank said. S&P 500 earnings are expected to post a "lackluster 1%" growth through 2023.

The narrowing of the difference between dividend yields and the 10-year Treasury yield is another boost for the argument that bonds are a viable competitor to stocks, especially when considering the long-standing reputation of Treasurys as a nearly risk-free investment.

"Although our dividend forecasts imply upside to dividend futures, more liquid instruments now offer competitive yields. Today, a nominal 1-year US Treasury note yields 5.4%, offering roughly the same return on invested cash that investor could expect from buying and holding to maturity the 2024 S&P 500 dividend futures contract, assuming it converges without forecast," the bank said in a note.

Dividend-yielding stocks are also unlikely to do well until the Fed begins to cut interest rates, strategists said, which probably won't happen soon. The Fed has warned rates in the economy could stay higher-for-longer is it continues to monitor inflation, which will weigh on dividend-paying companies.

"Our economists expect that the Fed will not deliver the first cut to the Fed Funds rate until the end of 2024. We believe that investors should wait until policy rate cuts are more clearly in view to begin buying dividend payers," the note added.

Bond yields have surged as investors adjust to the outlook for higher-for-longer interest rates, with the 10-year yield hovering around 4.86% on Friday. This week, the benchmark US government bond hit 5% for the first time since 2007.