Unlocking 4.36% Yield in a Rising Rate World: The Case for TULB's Surprising Dividend

In a landscape where bond yields are under relentless pressure from rising interest rates, the TD U.S. Long Term Treasury Bond ETF (TULB.TO) has defied expectations by declaring a CAD 1.235 dividend for 2025, translating to a 4.36% yield as of June 19. This stands out as a rare income opportunity in an environment where traditional bond investors are grappling with shrinking returns. But how is TULB achieving this, and what does it mean for investors?

A Paradox in the Bond Market: High Yield in a Rising Rate World

Conventional wisdom suggests that long-term bonds—like those held by TULB—are among the most vulnerable to rising rates. As rates climb, bond prices fall, creating a stark trade-off between capital preservation and income. Yet TULB's 4.36% yield defies this logic, offering investors a compelling payout at a time when even high-grade corporate bonds struggle to break 4%.

The answer lies in TULB's unique structure: a buy-write strategy paired with exposure to U.S. Treasury bonds with durations of 10 years or longer. This hybrid approach generates income not just from bond coupons but also through option premiums. By selling call options on the underlying bonds, the ETF can enhance returns even in sideways or falling markets. This dual-income model has proven resilient, as seen in its 30% average dividend growth over three years despite volatile bond markets.

Historical Trends: From Volatility to Stability

TULB's dividend history tells a story of evolution. From 2020 to 2022, payouts fluctuated wildly—dropping as low as CAD 0.0108 in 2021 before surging to CAD 1.1604 by late 2022. However, since early 2023, dividends have stabilized at around CAD 1.13, with the current CAD 1.235 marking a new high. This consistency suggests the ETF's strategy has matured, balancing risk and reward in a way that benefits income seekers.

Why Now? The Steep Yield Curve and Option Premiums

The U.S. Treasury yield curve—the difference between short- and long-term rates—is at its steepest in decades. For TULB, which focuses on long-term bonds, this creates two advantages:
1. High coupons: Long-term Treasuries carry higher interest rates than shorter-dated bonds, boosting income.
2. Option premium potential: A steep yield curve often correlates with elevated volatility, which increases the value of the call options TULB writes. This “extra” income helps offset potential price declines in the bond portfolio.

Meanwhile, the -4.7% YTD price drop in TULB reflects its sensitivity to rising rates—a risk investors must weigh against its dividend. However, the ETF's CAD 108.42 price remains above its 52-week low of CAD 105.74, indicating some resilience.

Is TULB a Buy?

For income-focused investors, TULB's 4.36% yield is a standout in today's market. The dividend is not just high but also growing, with the CAD 1.235 payout marking a 9% increase from its 2024 level. This stability after years of volatility is a positive signal.

However, rate-sensitive investors must proceed cautiously. Long-term bonds face significant headwinds if the Fed continues to hike rates. The ETF's -7.22% one-year price decline underscores this risk. To mitigate it:
- Pair with short-term bonds: Use TULB as a tactical allocation (5-10% of a bond portfolio) to capture income while hedging with shorter-duration ETFs like BND or SHY.
- Focus on total return: Prioritize the dividend yield over capital appreciation.

Final Take: A Niche Opportunity with Caveats

TULB's CAD 1.235 dividend is a rare income beacon in a rising-rate environment, but it's not without risks. Investors should view it as a supplemental tool for portfolios seeking yield, not a core holding. Pair it with diversification and keep an eye on Fed policy—should rates stabilize or reverse, TULB could shine.

In sum, TULB offers a compelling 4.36% yield rooted in a strategy that blends bond coupons and option premiums. While risks exist, the ETF's stabilized payouts and unique structure make it worth considering for income investors willing to navigate the volatility of long-term bonds.