I Bonds Are Yielding 5.51%. Can Dividend Stocks Keep Up?

The Treasury is currently offering a higher income rate than any stock in this month’s income group, but the picture changes once taxes, payment timing and the effect of easing inflation are taken into account.

Series I savings bonds issued in the current six-month window carry a composite rate of 5.51%, including a 1.4% fixed rate that remains in place for the life of the bond. That headline figure is above the forward dividend yield of every stock in this month’s six-stock income basket. Even so, the right comparison involves more than a single percentage. A retiree has to weigh how dependable each payment is, whether it can increase, when the cash is received and how each income stream is taxed.

How I Bonds Work and When the Rate Resets

The U.S. Treasury sells I bonds directly as savings bonds. Their return has two parts: a fixed rate that never changes and an inflation-based rate that is reset twice a year. Treasury makes it clear that the rate can rise or fall. A bond purchased now earns the 5.51% composite rate for its first six months. After that, the return changes to the next inflation component plus the same 1.4% fixed rate. The 5.51% rate is not locked in beyond that initial six-month period.

In practice, the bond works this way:

• Interest compounds, but it is not paid out along the way. It accrues monthly and compounds semiannually. Treasury pays nothing until the bond is redeemed.
• Maturity. I bonds earn interest for 30 years. Electronic bonds are paid automatically at maturity and then stop earning.
• Lockup and penalty. Redemption is allowed only after 12 months. If the bond is cashed in within five years, the last three months of interest are forfeited.
• Purchase cap. Each Social Security number may buy up to $10,000 of electronic I bonds per calendar year through TreasuryDirect. Since January 1, 2025, I bonds have been available only in electronic form, so paper purchases with a tax refund are no longer offered.

Principal and accrued interest are backed by the U.S. government within the stated limits. Because I bonds are direct obligations of the Treasury, they are not bank deposits and are not covered by FDIC insurance. That backing protects repayment of principal plus interest already earned, but it does not remove the risk of lower future rates when inflation slows, the 12-month waiting period or the early-redemption penalty.

The biggest exposure is reinvestment risk. The variable portion of the rate can decline at each reset, and once a bond reaches final maturity, the money must be reinvested at whatever rates are available then. I bonds also cannot be traded between investors, so they do not carry the market-price risk that marketable bonds do before maturity. The tradeoff is less liquidity.

Dividend Income Versus I Bond Interest: Safety First, Then Growth

The table below shows the forward dividend yields for the basket, based on each company’s annualized forward dividend and its share price in early trading. Yield measures income relative to price. It does not include share-price movement, and stock prices change every day.

Dividend Safety Depends on Earnings, Cash Flow and Board Approval

Each dividend here relies on earnings, cash flow and a board decision. By contrast, Treasury credits I bond interest by formula, and the composite rate cannot fall below zero. Before comparing yields, a retiree should first ask how secure each payment really is.

Exelon has the highest yield in the group, but it also faces the most visible pressure on its balance sheet. Its regulated utilities provide steady cash flow, and it pays out about 60% of adjusted operating EPS. On the other hand, the company took a $130 million after-tax hit from a regulatory denial at PHI this quarter. It also has a $41.7 billion investment plan and expects to need $3.4 billion in new equity through 2029. Moody’s lowered PECO to A1 from Aa3, and S&P cut BGE to A- from A.

Principal Financial posted third-quarter adjusted EPS of $2.22, below the $2.43 consensus estimate, because of weak variable investment income and pension results. Insurance earnings are sensitive to market conditions. Qualcomm’s balance sheet supports its dividend, with interest coverage of 18.6 times. Still, handset revenue fell 20% year over year, and the shares dropped 11.6% in the week ending Nov. 4. That decline underscores the price risk tied to dividend income. An I bond’s redemption value does not fluctuate with the market.

Linde shows the strongest coverage in the group. It produced $1.78 billion in free cash flow during the quarter and has an $11.0 billion project backlog. Northern Trust beat estimates with GAAP EPS of $3.40, although one-time gains helped the result, and bank earnings tend to rise and fall with markets. Nasdaq has $3.37 billion in annualized recurring revenue, up 12%, giving its payout a stable base.

Dividend Growth Gives Stocks an Edge Over a Fixed 1.4% Rate

Stocks have the advantage when it comes to growth. An I bond’s 1.4% fixed rate never changes, and any increase in its overall return depends on inflation. A dividend, however, can rise as the business expands. These six companies have all increased their payouts:

• Linde raised its quarterly dividend from $1.39 in 2024 to $1.50 in 2025 and $1.60 in 2026.
• Northern Trust increased its payout to $0.88 from $0.80.
• Nasdaq moved from $0.27 to $0.31.
• Principal Financial’s fourth-quarter payout of $0.85 is 8% higher than a year ago, and the company has recently raised its dividend every quarter.
• Qualcomm increased its dividend from $0.89 to $0.92.
• Exelon is targeting 5% annual dividend growth, and its quarterly payment has increased from $0.36 in 2023 to $0.42 in 2026.

Timing matters as well. These companies pay every quarter. An I bond pays nothing until redemption, so it can build value over time but does not provide money for monthly expenses. Retirees who want savings to function like a paycheck generally have to create that themselves by mixing income sources and payment dates.

Taxes Often Decide Which One Wins

I bonds: Interest is subject to federal income tax but exempt from state and local income taxes. Taxpayers using the cash method can defer reporting until the earlier of the year they cash in or dispose of the bond, or the year it matures. They may also elect to report the growth each year. Deferral can help, but a large redemption may create a sizable tax bill in one year. Interest used for qualified higher-education expenses may be excluded from income.

Dividends: Qualified dividend income from domestic corporations and qualified foreign corporations is taxed at long-term capital gains rates under 26 U.S.C. § 1(h)(11), provided holding-period requirements are met. Those rates are usually below ordinary-income rates for most taxpayers. Dividends are still taxed in the year they are received, and most states tax them as ordinary income. The state-tax exemption for I bonds is a meaningful advantage for residents of high-tax states. Residents of states with no income tax do not get that benefit, so the lower federal rate on qualified dividends matters more.

Which Option Fits Which Investor

For savers who want Treasury-backed, inflation-linked growth, do not need the money for at least a year, are comfortable with the $10,000 annual limit and live in a state with income tax, I bonds may be the better fit. Dividend-paying names such as Linde, Northern Trust and Principal Financial may suit retirees who need quarterly cash, want income that can grow faster than a fixed rate and can tolerate share-price swings. Exelon and Qualcomm may appeal to income investors who accept more payment risk in exchange for a higher current yield and who are willing to watch regulatory decisions and handset demand closely.