Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Growth ETFs Outperform Bonds in a Steepening Yield Curve
Transcript
- Lucas: The yield curve is steepening in a way we haven't seen in months. Ten-year Treasury yield hit 4.71 percent this week, the two-year is at 4.37, so the spread is widening, and the Fed is still holding the funds rate at 3.63. That combination is making a lot of income investors rethink bonds. Luna: Right, because if rates keep climbing, your bond principal takes a hit. Are dividend stocks really a better option here? Lucas: Not all dividend stocks, but the ones that grow their payouts consistently. Look at SCHD, the Schwab U.S. Dividend Equity ETF. It focuses on companies with sustainable dividend growth and quality metrics. Its current yield is around three and a half percent, which actually trails the ten-year, but its total return story is different. Luna: Because the dividend grows every year. So you're getting a rising stream of income, not a fixed coupon. Lucas: Exactly. That rising stream has a shorter duration, effectively. When interest rates rise, long-term bonds get crushed because their cash flows are fixed far into the future. But a stock that raises its dividend annually—say Coca-Cola, which has done it for 63 years—those future cash flows adjust upward, offsetting some of the rate impact. Luna: So the equity dividend has a built-in hedge. How have these ETFs actually performed this week? Lucas: SCHD is basically flat over the last five days, around 33.29. VYM, the Vanguard High Dividend Yield ETF, is also flat near 162. Meanwhile, longer-duration bonds—like those with 20-plus year maturities—have lost value as yields pushed up. The 30-year Treasury now yields 5.17 percent, up from 5.15 just a few days ago. Luna: So in a steepening curve, dividend growth ETFs are providing a cushion. But why not just go for the highest yield, something like VYM? Lucas: High yield can be tempting, but many high-yield stocks have slower dividend growth. In a rising-rate environment, you want the compounding effect. SCHD's methodology selects for dividend growth and financial health. Over time, its total return often beats pure yield plays. J.P. Morgan Asset Management published a report this month showing that dividend growers outperformed the broader market in the first half of 2026. Luna: That's a concrete data point. And this ties back to what we covered a few episodes ago on free cash flow coverage. Dividend growth only works if the company generates enough cash. Lucas: Right. The key metric is the payout ratio relative to free cash flow. For SCHD, its top holdings—like Coca-Cola, Johnson & Johnson, and Procter & Gamble—all have strong cash conversion. They can raise dividends even when the economy slows. P&G's stock is around 147, down slightly but steady. Luna: It's almost like owning a bond that pays you more each year. But investors need to accept more volatility than a bond. Lucas: Absolutely. No free lunch. But when the yield curve steepens and long-term bonds lose value, dividend growth ETFs offer a different risk profile. They have equity risk, but also a natural offset to rising rates. And with the Fed staying flat, there's no tailwind for bonds from rate cuts. Luna: If today's conversation helped you think about your portfolio differently, there's a simple way to ensure we keep producing these episodes ad-free. Lucas: Yeah, listener support is what makes this possible. If you found value in understanding how dividend growth ETFs can replace bonds, you can support the show at buy me a coffee dot com slash fexingo. It's a small gesture that keeps the content free for everyone. Luna: And we really appreciate it. Now, back to the strategy—so for someone building a portfolio today, would you allocate to SCHD over an aggregate bond ETF? Lucas: It depends on your time horizon. If you're within five years of retirement, bonds still serve a purpose as ballast. But for long-term income, dividend growth ETFs can be a core holding. They provide a rising income stream and have historically delivered better inflation-adjusted returns than fixed income over rolling ten-year periods. That's worth considering in a steepening curve like we have now. Luna: So the takeaway is: don't just chase yield, chase growth. And check the dividend growth history, not just the current rate. Lucas: Exactly. In July 2026, with the curve steepening and rates uncertain, dividend growth ETFs like SCHD offer a way to earn income that fights back against rising yields. That's a powerful tool.