Editor’s Note: When a 30-year Treasury yields 5%, most dividend stocks have to prove they’re worth the extra risk. Robert Rapier’s article today lays out exactly which balance sheets clear that bar — and which ones don’t. His answer in Utility Forecaster is a portfolio of essential-service companies built to deliver all three things at once: safety, income, and growth. See how all three fit →

The federal government is about to cross a threshold investors should not ignore. Net interest payments on the national debt are projected to exceed $1 trillion in fiscal 2026.

That is not the total deficit. It is merely the cost of servicing debt accumulated in previous years. Interest is now larger than every mandatory federal program except Social Security and Medicare. By 2036, the annual bill is projected to reach $2.1 trillion.

It is tempting to treat this as another Washington problem. Politicians will argue about who caused it, whose tax cuts were responsible, and which spending programs should be blamed. Investors should focus on a more practical question: How will the government’s growing need for capital affect interest rates, corporate profits, and asset prices?

The answer will not be the same for every investment.

The Government Has Become a Very Large Borrower

The federal government is projected to run a deficit of roughly $1.9 trillion this year, even though the economy is not in a recession. Debt held by the public is expected to reach about 101% of gross domestic product in 2026 and continue climbing over the next decade.

This is not a forecast of an imminent default. The United States borrows in its own currency and continues to enjoy extraordinary access to global capital markets. But every dollar the Treasury borrows must still come from someone.

Treasury securities compete with corporate bonds, mortgages, municipal debt, and equities for investor capital. As the supply of government debt rises, investors may demand higher yields to absorb it. That raises borrowing costs across the economy and can crowd out private investment.

The 10-year Treasury yield is currently around 4.5%, while the 30-year bond yields roughly 5%. Those returns provide investors with a credible alternative to stocks, real estate, and lower-quality corporate debt.

This raises the hurdle for nearly every other investment. Why accept substantial business risk for a 4% dividend if a Treasury bond offers a similar yield? Why pay a premium valuation for a slow-growing company when relatively safe securities provide meaningful income?

Companies now have to compete with the government not only for capital, but also for investors.

Balance Sheets Will Separate the Winners From the Losers

For much of the decade following the financial crisis, money was unusually cheap. Companies could refinance debt at low rates, make acquisitions, repurchase shares, and support dividends without placing much strain on cash flow.

That environment rewarded leverage. The next one may punish it.

The average interest rate on the government’s outstanding debt remains below current market rates because much of it was issued when borrowing costs were lower. As those securities mature and are refinanced, interest expense will rise. Corporations face the same problem.

A company may appear healthy today because its existing bonds carry coupons of 3% or 4%. If those bonds must be replaced with debt costing 6%, 7%, or more, interest expense can rise sharply even if the company does not borrow another dollar.

This is why investors need to look beyond a company’s current earnings and dividend yield. I am paying closer attention to debt-maturity schedules, interest coverage, free cash flow, and the proportion of debt carrying fixed versus floating rates.

Two companies in the same industry can face very different futures depending on when their obligations come due. One may have locked in low borrowing costs for years, while the other faces a refinancing wall just as rates remain elevated.

Investors should be especially cautious with businesses that combine heavy debt, weak cash flow, and substantial near-term maturities. A high dividend yield does not compensate for a balance sheet that may eventually force management to cut the payout or issue stock at an unfavorable price.

Where I Would Position Now

The answer is not to abandon stocks. It is to become more selective about which risks you are being paid to take.

I favor companies with durable cash flow, manageable debt, and enough pricing power to protect margins. Dividend growth is generally more valuable than the highest current yield. A company that regularly raises its payout from internally generated cash is in a stronger position than one borrowing money to defend an unsustainable distribution.

Utilities and real estate investment trusts can still play important roles in an income portfolio, but investors should not buy them indiscriminately. Both sectors depend heavily on capital markets. The strongest candidates have well-laddered debt maturities, access to investment-grade financing, and projects capable of earning returns comfortably above their cost of capital.

Selected banks and insurers can also benefit from higher yields, although the details matter. Banks must manage deposit costs and credit quality, while insurers need assets and liabilities that respond favorably to changing rates. Simply saying that financial companies benefit from higher rates is too broad to be useful.

I also favor maintaining some exposure to companies tied to physical assets and essential services. Energy infrastructure, selected commodity producers, and other real-asset businesses may provide protection if persistent deficits contribute to renewed inflation or currency weakness. Balance-sheet quality remains critical, however. An indebted commodity producer can still fail even when the commodity outlook is favorable.

Treasury bills and short-duration bonds also deserve a place in many portfolios. They currently provide competitive income without requiring investors to lock up their money for decades. A maturity ladder can preserve flexibility while generating cash that can be redeployed when the market presents better opportunities.

Finally, this environment is well suited to disciplined option strategies. Covered calls can generate additional income from stocks we already own, while cash-secured puts allow us to target entry prices below the current market.

When higher rates and fiscal uncertainty create volatility, options can turn some of that uncertainty into cash flow. But the specific stock, valuation, strike price, expiration date, and premium determine whether an options trade reduces risk or merely disguises it. That is where careful security selection and trade construction become far more important than broad sector recommendations.

The Interest Bill Will Keep Growing

The federal debt debate is not going away. Interest costs are projected to increase rapidly over the coming decade, consuming an ever-larger share of federal revenue and limiting the government’s ability to respond to future recessions, wars, or financial crises.

Congress may eventually raise taxes, reduce spending, tolerate more inflation, or adopt some combination of the three. None of those choices would be painless, and each would create different winners and losers in the market.

Investors do not need to predict exactly which political solution will prevail. They do need portfolios capable of surviving expensive capital, periodic inflation, and increasing competition from government bonds.

The $1 trillion interest bill belongs to Washington. Its consequences will show up in our portfolios.

Everything I’ve outlined in this article — durable cash flows, manageable debt, dividend growth over time, essential-service businesses with mandated demand — is the investment framework I apply in Utility Forecaster every month. In a world where 30-year Treasuries yield 5%, my portfolio has to earn its place. Last year it did: the Income Portfolio returned 10.7% with a 4.8% yield and moved less than half as much as the market (beta 0.41). The Growth Portfolio returned 16.5%. That trifecta — safety, income, and real appreciation — is what I’ve spent decades building toward, and it’s exactly what the current rate environment demands. See the portfolios and this month’s Best Buys →