Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Dividend Stocks vs Savings Accounts in July 2026
Transcript
- Lucas: So we're in a weird moment for income investors. The federal funds rate is at 3.63 percent — has been flat since June. But if you look at a simple high-yield savings account right now, you can get maybe 4.2 percent, no risk, no volatility. That makes you wonder: why bother with dividend stocks at all? Luna: Right. I mean, Altria is yielding around 7.7 percent, but the stock is down year-to-date. A savings account doesn't drop 3 percent in a week. Lucas: Exactly. And that's the tension. Altria — ticker M-O — currently trades around 74 bucks, and its dividend is about $3.92 annually. That's a 7.7 percent yield. Compare that to a money market yielding 4.2 percent, and you're getting almost double the income. But the risk is that the stock price erodes your principal. Luna: And with the ten-year Treasury at 4.57 percent, that's the risk-free benchmark. So you're asking for an extra three percentage points of yield to own a tobacco company with declining volumes. Lucas: Right. The equity risk premium is about 300 basis points there. But here's the thing: that 4.2 percent from a savings account is not locked in. If the Fed cuts rates — and the market is pricing in a cut later this year — that savings yield could drop to 3 percent or lower. Altria's dividend, assuming it's maintained, stays at 7.7 percent on your cost basis. Luna: So you're trading certainty of income for certainty of yield? Because with the savings account, you know exactly what you'll earn next month. With the stock, you don't know the total return. Lucas: Exactly. And that's the framework I want to drill into today. Because a lot of investors look at yield in isolation. They see 7.7 percent and think 'that's better than 4.2 percent.' But they forget that the 4.2 percent is virtually guaranteed, while the 7.7 percent comes with price risk, dividend risk, and tax complications. Luna: Let's talk about taxes, because that's a big one. Savings account interest is taxed as ordinary income — up to 37 percent for high earners. Qualified dividends are taxed at lower capital gains rates, usually 15 or 20 percent. Lucas: Right. So if you're in the top bracket, your after-tax yield on that 4.2 percent savings account is about 2.6 percent. Meanwhile, Altria's 7.7 percent dividend, taxed at 20 percent, gives you about 6.2 percent after tax. That's a huge difference. Luna: But Altria's dividend might not be qualified. If you haven't held the stock for 60 days, it's ordinary income. And with MO, there's always the risk of a dividend cut. Lucas: Right. So the comparison is not just yield versus yield. It's after-tax, risk-adjusted, with a time horizon. And that's where dividend growth stocks become interesting. Take a company like Realty Income — ticker O — which is a REIT. Its dividend is not qualified, so it's taxed as ordinary income. But O has raised its dividend for over 25 years. Luna: O is at 65.71 today, up 2.4 percent in the last five days. Its dividend yield is about 5.2 percent. So after tax at the top bracket, that's about 3.3 percent. Still less than a savings account before tax, but the dividend grows. Lucas: And that growth is the key. Because if you buy O today and it raises its dividend 4 percent a year, in five years your yield on cost is over 6 percent. Meanwhile, that savings account might be yielding 2 percent if rates normalize. So the dividend stock wins over time, but only if you can stomach the price volatility in the meantime. Luna: And if you need the income now, not five years from now, the savings account is probably better. So it's really about your time horizon. Lucas: Exactly. And let's be honest — a lot of dividend investors are retirees who need current income. For them, the savings account at 4.2 percent, or a CD ladder, might be the smarter play. No sequence of returns risk. Luna: But what about the Schiller argument? That even with rate cuts, savings yields might stay higher for longer? Dallas Fed President Logan just called for modestly higher rates. Lucas: Yeah, that headline from July 16. Logan is hawkish. So the Fed might not cut as fast as the market hopes. That makes the savings account more attractive for longer. But you can't predict that. Luna: So what do you do? Just split the difference? Keep some cash in savings, some in dividend stocks? Lucas: That's actually what we recommend to listeners. Have a cash bucket — maybe six months of expenses — in a high-yield savings or money market. Then build a dividend portfolio with a long-term view. And don't chase yield. The highest yields often come with the most risk. Luna: Like Altria. Or Verizon at 6 percent yield, but the stock is down 15 percent in five years. Lucas: Right. Verizon — V-Z — yields about 6.2 percent, but the total return has been negative. So you're better off in a savings account if you just care about income. But if you believe Verizon's dividend is safe and will grow, eventually the math flips. Luna: And we should mention ETFs. VYM, the Vanguard High Dividend Yield ETF, yields around 2.8 percent. SCHD yields about 3.5 percent. Those are lower than savings accounts, but they offer diversification and dividend growth. Lucas: SCHD is at 32.91, up 1.1 percent in five days. Its yield is about 3.5 percent. After tax, that's maybe 2.8 percent for a top-bracket investor. A savings account gives you 4.2 percent pre-tax, so 2.6 percent after tax. So SCHD actually wins on an after-tax basis, slightly. And you get growth potential. Luna: But it's not guaranteed. The savings account is FDIC insured. SCHD can drop 20 percent in a bear market. Lucas: Right. So the trade-off is clear: safety versus potential return. And right now, with rates at 3.63 percent and the ten-year at 4.57, the risk-free option is pretty compelling. I think a lot of investors are under-allocated to cash. Luna: You've mentioned this before — the 'cash is trash' mantra from the zero interest rate era is dead. Lucas: Totally dead. Cash yields over 4 percent. That's not trash. That's a real positive real return, even with inflation around 3 percent. So for income investors, the bar for taking equity risk is higher. Luna: And that's a healthy thing. It forces you to really analyze whether a dividend stock is worth the risk. Lucas: Exactly. And that's the conversation we want to have here — not just 'buy dividend stocks because they pay income,' but 'compare your options and make an informed choice.' Luna: And we try to do that every day on this show, with no ads, no sponsors pushing products. It's just us, sharing what we think. Lucas: Yeah. We deliberately keep this podcast ad-free because we think that's the right way to have honest money conversations. If you find that valuable and want to support it, you can do that at buy me a coffee dot com slash fexingo. No pressure, just an option for those who want to help. Luna: Absolutely. So back to the numbers: let's take a listener who has $100,000 to allocate for income. They could put it all in a savings account earning 4.2 percent, that's $4,200 a year, taxable. Or they could put it in SCHD, earning 3.5 percent, but with growth potential. Which one do you pick? Lucas: I'd say it depends on their need for liquidity and their tax situation. If they're in a low tax bracket, the savings account is simpler and safer. If they're in a high bracket, the qualified dividends from SCHD might be better after tax. And if they have a long time horizon, SCHD likely wins because of dividend growth. Luna: So there's no one-size-fits-all answer. That's the real takeaway. Lucas: Right. And the worst thing you can do is just chase the highest yield without understanding the risks. That's how people end up owning stocks that cut their dividend right when they need the income. Luna: Or buying a REIT like O without understanding that its dividends are taxed as ordinary income, which can be a nasty surprise at tax time. Lucas: Exactly. So know your tax situation, know your time horizon, and compare apples to apples. A 4.2 percent savings yield is not directly comparable to a 5.2 percent REIT yield. You have to adjust for risk and taxes. Luna: And for growth. Because the savings account yield is fixed, while the dividend can increase. Though it can also decrease. Lucas: Right. So the conversation is nuanced. But I think the key number to remember is 4.2 percent — that's what you can get risk-free today. If a dividend stock doesn't offer a clear path to beating that after taxes and risk, it's not worth it. Luna: And that's a good benchmark for all of us. Thanks, Lucas. Lucas: You got it. Next time we'll look at a specific dividend stock and run this comparison in detail.