Top dividend ETFs like the Schwab US Dividend Equity (NYSE:SCHD), iShares Core Dividend Growth (NYSE:DGRO), and Vanguard High Dividend Yield (NYSE:VYM) soared to their record highs this week, continuing an uptrend that has been going on for years.

SCHD, DGRO, and VYM dividend yields have dripped

The challenge, however, is that their stock performance has affected their dividend yields. SCHD yields 3.22%, while DGRO and VYM yield just 1.96% and 3%, respectively. This decline is because the payout remains the same as its stock rises. 

These yields have become much lower than what government bonds are paying today. While bond yields pulled back this week, the two-year Treasury yield remains at 4.12%, while the ten-year is at 4.55%. The 30-year remains stubbornly above 5%.

US Treasury yields have jumped amid the rising risks of the US economy as consumer inflation rises. The headline Consumer Price Index (CPI) jumped to 3.8%, while the closely-watched Producer Price Index (PPI) rose to 6%. 

They have all moved further away from the Federal Reserve's target of 2.0%. Minutes released this week showed that most officials hinted that the bank will need to hike rates if inflation remains elevated. 

Most notably, Christopher Waller, one of the most dovish governors, has turned hawkish. In a statement on Friday, he said that the bank's next move should be a hike, pushing the Polymarket odds for a rise this year to 48%.

Therefore, barring any major development, such as the Iran war ending and a dramatic drop in prices, chances are that bond yields will continue rising this year.

Dividend ETFs offer more growth than bonds

The rising US bond yields are attractive to income investors. For one, a $10,000 investment in a ten-year bond will bring in $455 a year assuming that yields remain at the current level. 

On the other hand, a similar amount invested in SCHD, DGRO, and VYM will bring in just $322, $196, and $221, respectively. These are huge differences that favor government bonds.

However, bonds have a major limitation in that they lack growth. A $10,000 investment will bring $455 and nothing more. On the other hand, SCHD, DGRO, and VYM have a lower yield, while still generating strong stock returns. 

For example, $10,000 invested in US government bonds five years ago would have brought less than $500 in coupon payments a year. In contrast, the SCHD, DGRO, and VYM have had a total return of 52%, 80%, and 71%, respectively. 

Another potential catalyst for these funds is that most analysts believe that the stock market will continue rising in the foreseeable future. That's because earnings growth remains elevated and US equities are still at bargain prices. 

Most notably, while the US stock market experiences some corrections, the reality is that it has been in an uptrend in the past decades. This trend may continue, making these stock ETFs better than bonds.