Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend ETFs Absorb Rate Shocks in July 2026
Transcript
- Lucas: Let's start with a number: thirty-seven basis points. That's the spread between the 10-year and 2-year Treasury as of Thursday. Luna: Down from forty-one the week before. So the curve is flattening — again. Lucas: Right. And in the dividend ETF world, that flattening has created a clear performance split. Over the past five trading days, SCHD is up one point one percent. VYM is down zero point four. DVY is up zero point eight. Luna: So the market is picking winners even within the dividend space. SCHD and DVY are holding up, VYM is not. Lucas: Exactly. And the reason is sector composition. VYM is heavily weighted toward consumer staples and healthcare — Coca-Cola, Johnson & Johnson, Procter & Gamble. Those stocks are getting hit. KO is down three point two percent in the same period. JNJ is down one point eight. PG is up slightly, but it's not enough to offset. Luna: Meanwhile, SCHD has a bigger tilt toward financials and industrials. Banks actually benefit from a flatter curve, at least in the short run. Lucas: That's the key. When the yield curve flattens, the narrative shifts. Investors start asking: which dividends are safest if rates stay higher for longer? And which ones might get squeezed? The market is repricing risk within the dividend space. Luna: And we also had Dallas Fed President Lorie Logan this week saying she wants 'modestly' higher rates. That's a hawkish signal. Lucas: It is. And the market listened. The two-year yield ticked up from four point thirteen to four point sixteen percent. The ten-year went from four fifty-five to four fifty-seven. That's not a huge move, but it tells you the market is pricing in at least one more hike. Luna: So for dividend investors, the question becomes: how much rate risk is baked into your ETF? Not all dividend stocks are created equal when the Fed is still tightening. Lucas: And that's where I think people get tripped up. They see 'dividend ETF' and assume it's all defensive. But VYM is down year-to-date. SCHD is up. The difference is about five percentage points. Luna: Let's talk about why. SCHD has a higher exposure to sectors that benefit from a steep curve — or at least don't get hurt as much by a flat one. Financials are about twenty percent of SCHD. In VYM, it's more like twelve percent. Lucas: And DVY sits in the middle — it's the Dow Jones Select Dividend Index, which has a quality and yield screen. It's up zero point eight percent this week, so it's holding its own. But it also has more utilities and telecom, which are rate-sensitive. Luna: Verizon is up two point one percent this week, actually. That's a bright spot in DVY. Lucas: And Altria is up three point three percent. So there's a rotation happening. Investors are moving away from the classic 'safe' dividend stocks — the KOs and JNJs — and toward higher-yielding, more rate-resilient names. Luna: Is that a short-term trade or a longer-term shift? I mean, KO and JNJ have been dividend aristocrats for decades. Lucas: I think it's a cyclical rotation, not a structural one. When rates stabilize or start coming down, those staples will come back. But right now, the macro environment favors dividend growers over high-yield laggards. SCHD's dividend growth rate is around eleven percent per year. VYM's is more like six. Luna: That's a big gap. And growth matters when inflation is still above the Fed's target. Lucas: Exactly. So let's bring this back to the individual investor. If you're building a dividend portfolio today, you can't just buy VYM and call it a day. You need to think about which sectors are rate-sensitive and which aren't. Luna: And you need to check the yield curve. The spread is only thirty-seven basis points. That's historically low. It tells you the market expects rates to stay elevated. Lucas: Right. So maybe you tilt toward SCHD or DVY. Or you build a custom basket with a mix of financials, energy, and select consumer staples. The point is: be intentional. Luna: And don't forget about Realty Income. It's up two point four percent this week. REITs are actually benefiting from the narrative that rates might not go much higher. Lucas: Good point. Realty Income has been a steady performer. But it's also rate-sensitive because of its debt. So it's a balancing act. Luna: If our money conversations have helped you think about a decision differently — maybe about which ETF to choose or how to weather a rate shock — that's exactly why we do this show. Lucas: And we keep the show ad-free because listeners like you support it. If you find value in what we do, you can buy us a coffee at buy me a coffee dot com slash fexingo. That's buy me a coffee dot com slash fexingo. Luna: It's a small gesture that lets us keep the focus on the numbers and the strategy. Anyway, back to the yield curve — because there's one more angle I think matters. Lucas: What's that? Luna: The three-month yield is at three point eight four percent. That's higher than the dividend yield on the S&P 500. So cash is finally a competitor to dividend stocks. Lucas: That's a huge point. For the first time in years, you can earn almost four percent in a money market fund with zero risk. That changes the opportunity cost equation for dividend investors. Luna: So if you're holding a stock yielding three percent, you're taking equity risk for less yield than cash. That's not a great trade-off unless you expect dividend growth. Lucas: Exactly. And that's why dividend growth stocks — the ones that can raise their payout consistently — are more valuable today. You're buying future income, not just current yield. Luna: So the playbook for the rest of 2026 might be: favor dividend growers, be selective about sectors, and keep an eye on the curve. Lucas: And don't ignore cash. A money market fund yielding three point eight four percent is a legitimate portfolio allocation right now, especially if you need liquidity. Luna: It's a strange world when cash yields more than Coca-Cola. Lucas: It is. And that's exactly why we have these conversations. The rules change. You have to adapt.