By Ian Salisbury

Investors prompted to seek shelter as DeepSeek rocks the stock market may want to skip bonds and seek out dividend stocks. They offer attractive yields without some of the problems lately dogging the fixed-income market.

The Magnificent Seven group of tech stocks was down 3.1% on Monday as the popularity of the new Chinese AI competitor, which uses relatively low-cost technology, undercut high expectations for additional spending on artificial intelligence. The S&P 500 lost 1.5%.

While DeepSeek's long-term prospects are hard to judge, the market's jittery reaction underlines how tentative the tw0-year-old bull market has become. Stocks, which hit a record high just last week, are trading at price/earnings ratios not seen since the 1990s.

Wall Street analysts expect 2025 earning growth of nearly 12%, roughly double the long-term median rate. No wonder traders are feeling jumpy.

With little room for error in the stock market, investors may want to turn defensive. For many, dividend stocks will look more attractive than bonds.

The iShares Core U.S. Aggregate Bond ETF, a fund that tracks the broad bond market, was doing its job tolerably well Monday. It gained 0.6%, offsetting a bit of investors' stock market losses.

But bonds remain an iffy proposition. Long-term bonds recently turned in their worst 10-year performance stretch in 90 years. While investors once hoped for a steady decline in short-term interest rates this year, which would have boosted bond prices, that now seems off the table. Blame strong U.S., economic growth alongside President Donald Trump's tariff threats and plans for unfunded tax cuts, which have rekindled fears about inflation.

"As long as economic growth is firm and the Fed is non-committal about future rate cuts, we should expect a tailwind on yields," wrote Tom Essaye, author of the Sevens Report newsletter Monday. "Don't expect a big drop in the 10-year yield unless we see very weak data."

A better bet may be to steer a middle course between volatile growth stocks and relatively staid bonds by buying dividend payers. While the S&P 500 tumbled Monday, the Schwab U.S. Dividend Equity ETF, with a yield of 3.8%, rallied 1.3%. One big reason: Only about 10% of the fund's holdings are tech stocks, compared with 33% for the S&P 500.

Investors who want a more targeted approach can check out individual stocks that bucked Monday's sell off. Cable provider and NBC-parent Comcast rallied 1.6%. The complex conglomerate received mixed reviews for its plan to spinoff networks including MSNBC, CNBC, and USA in late 2025. But it yields 3.3% and trades at just nine times the earnings per share expected for 2025.

Phone companies Verizon and AT&T also rallied Monday, after recently reporting strong earnings. Verizon, boasting a 6.8% yield, was up 2.8% after beating analysts' profit forecasts Friday, helped by higher prices for mobile plans.

AT&T rose more than 6% Monday after it reported a 3.3% increase in mobile service revenue and a 7.8% gain in broadband revenue.

MoffettNathanson analyst Craig Moffett said he was impressed by AT&T's ability to support a generous dividend while also paying down debt and spending more than $20 billion on capital investment in 2024. The stock yields 4.9%.

"AT&T's strong free cash flow has left the company in the enviable position of 'yes, and' rather than 'either, or," he wrote in a note Monday.

Write to Ian Salisbury at ian.salisbury@barrons.com

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January 27, 2025 16:38 ET (21:38 GMT)

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