Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Growth Trumps High Yield in July 2026
Transcript
- Lucas: So here's something that's been nagging at me all week. The ten-year Treasury yield hits four point four eight percent — up from four point four four just a few days ago — and while most dividend stocks are actually holding up fine, some are getting absolutely crushed. Verizon down eight point six percent in five days, while Coke and Procter and Gamble are up more than a percent and a half. Luna: Right, and I think a lot of investors hear 'dividend stock' and assume they're all the same boat. But the divergence is telling us something important. Lucas: Exactly. And the key difference — it's not just which sector they're in. It's about payout ratio and dividend growth trajectory. Verizon's payout ratio is around eighty percent. Coke's is about seventy. Johnson and Johnson is around eighty too, but their cash flow is stronger. Luna: So the market is punishing high payout ratios more when rates rise. Makes sense — if bonds yield four point five, a stock yielding five percent with shaky dividend coverage looks a lot riskier. Lucas: That's exactly the framework. I've been looking at the yield spread too — the ten-year minus two-year is now thirty-five basis points, up from thirty-one a week ago. That steepening yield curve typically means the economy is expected to grow, but it also means the cost of capital is going up for everyone. Luna: And companies with high debt loads or low free cash flow are going to feel that pinch first. Verizon carries a lot of debt from the spectrum auctions. Lucas: Right. And while Verizon's dividend yield is over five percent now — actually closer to six after the drop — the market is saying 'we don't trust that payout to sustain if cash flow tightens.' Meanwhile, Coke's dividend yield is only about three point two percent, but they've raised their dividend for sixty-three consecutive years. Luna: So the lesson might be: in a rising rate environment, dividend growth beats high yield. Lucas: That's the thesis I want to test today. Let's look at a few specific examples from this week. Johnson and Johnson is up three point three percent in five days. Their payout ratio is about eighty percent, but their free cash flow coverage is robust — they generate roughly twenty billion in free cash flow annually, and dividends cost them about twelve billion. Luna: So even at eighty percent payout ratio, the coverage is solid because the denominator — free cash flow — is large and stable. Lucas: Exactly. Compare that to Verizon, where free cash flow has been declining. Last year they generated about seventeen billion in free cash flow, but dividends cost them eleven billion — so payout ratio on free cash flow is around sixty-five percent, which isn't terrible, but the trend is negative. Luna: And the market hates negative trends when rates are rising. They look for any excuse to reprice risk. Lucas: Now look at Procter and Gamble — up one point six percent this week. Their payout ratio is about sixty percent, and they've raised dividends for sixty-eight years. Yield is around two point four percent, so not flashy. But the total return story is that the stock is holding its value while the dividend grows. Luna: Which is really the argument for dividend growth over high yield — you get appreciation plus growing income, rather than just a static high payout that may get cut. Lucas: And there's data to back that up. Over the past twenty years, the S&P 500 dividend aristocrats — companies that raised dividends for at least twenty-five years — have outperformed the broader S&P 500 by about two percentage points annually with lower volatility. Luna: So even with a four point four eight percent ten-year, those aristocrats still win. Because their dividend growth rate often exceeds the risk-free rate. Lucas: Right. Coke's dividend growth rate over the last five years is about four and a half percent annually. So even if the ten-year yields four point five, the stock's dividend is growing, while the bond's coupon is fixed. Over time, the stock's income stream catches up and surpasses. Luna: That's the magic of compounding growth. And it's why I think investors should be looking at free cash flow payout ratios rather than earnings payout ratios. Lucas: Great point. Earnings can be manipulated with accounting, but free cash flow is harder to fudge. Verizon's earnings payout ratio is about fifty percent, which looks safe, but on free cash flow it's higher and trending worse. Luna: So for listeners who are building a dividend portfolio right now, what's the takeaway? Should they avoid high yield completely? Lucas: Not completely. But I'd say: if you're going to buy a high-yield stock, you need to verify that the free cash flow covers the dividend comfortably, and that the company has a credible plan to grow that cash flow. Otherwise you're essentially taking bond risk with equity volatility. Luna: And maybe look at sectors that historically manage payout ratios well. Utilities, consumer staples, healthcare — they tend to have more predictable cash flows. Lucas: Yeah, and that's exactly what we're seeing this week. Utilities and staples are up, while telecom and some REITs are getting hit. Realty Income is actually up one point six percent this week despite being a high-yield REIT — but their payout ratio is around seventy-five percent and they have a long history of raising dividends. Luna: So it's not just about the yield level. It's about the quality of the dividend. Lucas: Exactly. And I think that's a good framework for the rest of 2026. If the Fed holds rates steady — which they are, with the fed funds rate at three point six three percent — and the ten-year stays around four point five, the market will keep rewarding dividend growers and punishing fragile payers. Luna: Speaking of keeping this conversation going, I know we talk a lot about building portfolios and analyzing dividends. If our money conversations have helped you think about a decision differently, listener support is what keeps this show ad-free and independent. Lucas: Yeah, it's a small thing that makes a big difference. If you're able, you can support the show at buy me a coffee dot com slash fexingo. That's all lower case. Luna: And it really does help us keep doing deep dives like this one. Now back to the data — I want to check one more stock: Altria. Lucas: Altria, ticker M-O, is down one point five percent this week. Their dividend yield is over eight percent now, which screams 'value trap' to me. Payout ratio is around eighty percent on earnings, but their volumes are declining as smoking rates drop. Luna: And they have exposure to Juul litigation, which adds uncertainty. So that eight percent yield might not be sustainable. Lucas: Right. Compare that to Coca-Cola, where volumes are stable globally, pricing power is strong, and the balance sheet is pristine. Their yield is three point two percent, but that dividend is almost certainly going to keep growing. Luna: So for the long-term income investor, the choice is clear: prioritize dividend growth over current yield, and always check the free cash flow payout ratio. Lucas: And if you're looking for a simple ETF to capture this, Schwab's U.S. Dividend Equity ETF, ticker s c h d, is up zero point nine percent this week. It screens for dividend growth and quality, and it's held up better than the high-yield Vanguard High Dividend Yield ETF, ticker V-Y-M, which is up zero point eight percent — similar, but SCHD has a lower yield and better total return over the long run. Luna: So the data from this week really reinforces the thesis. The market is paying a premium for dividend safety and growth. Lucas: And punishing anything that looks fragile. It's a good discipline for all of us as investors.