Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Procter and Gamble Dividend Yield Tells Only Half the Story
Transcript
- Lucas: Procter & Gamble lost 3 percent in the past five days. That's a bigger drop than anything else in the Dow this week. Luna: And the S&P 500 was up 0.8 percent over the same stretch. So PG is really bucking the trend. Lucas: Right. And if you're a dividend investor, that raises an uncomfortable question. PG yields about 2.8 percent right now, which is fine, but not remarkable. The real question is whether the dividend itself is at risk. Luna: Is it, though? It's Procter & Gamble. They've paid dividends for over 130 years. Lucas: That's the reflex — brand loyalty makes us think the dividend is unassailable. But let's look at the numbers. PG's payout ratio based on trailing earnings is around 65 percent. That's comfortable. But their free cash flow payout ratio last quarter was closer to 80 percent. Luna: So they're paying out more of their cash flow than earnings would suggest. Lucas: Exactly. And that's partly because earnings include non-cash items. The bigger issue is that PG's dividend growth has been slowing. They raised the dividend by about 4 percent this year, which is below their 10-year average of 5.5 percent. When a company that's supposed to be a dividend growth stock starts decelerating, the market pays attention. Luna: So the stock drop might be reflecting concerns about future dividend growth, not an imminent cut. Lucas: That's my read. Compare it to Johnson & Johnson. JNJ also dropped — 1.5 percent in the same period. But JNJ has a payout ratio under 50 percent and their dividend growth has been steady at about 5.5 percent annually. Their yield is 3.1 percent, slightly higher than PG. So the market is giving JNJ a premium valuation because the dividend trajectory looks more reliable. Luna: So yield alone is a trap. You could look at Verizon, which yields over 4.5 percent, and think that's better. Lucas: And you'd be wrong, for different reasons. Verizon's yield is high because the stock price has fallen. Their payout ratio is over 60 percent, but more importantly, their free cash flow has been under pressure from heavy capex needs. They've raised the dividend by only about 2 percent annually the last few years. So investors are getting a high current yield but minimal growth and elevated risk. Luna: So when you factor in inflation, a 2 percent raise means the real yield is actually shrinking. Lucas: Right. And that's the case I'd make for focusing on dividend growth stocks right now. The 10-year Treasury yield hit 4.56 percent this week, up slightly. That makes bonds more competitive with stocks for income. But a bond's yield is fixed. A dividend growth stock can increase its payout over time. The question is whether the market is pricing in that growth accurately. Luna: And with PG, maybe the market is saying, we're not as confident about that growth as we used to be. Lucas: Exactly. And that's why I think the selloff in PG is more about reassessment than panic. The company's fundamentals are still solid — they have pricing power, strong brands, global distribution. But the days of easy growth are behind them. They need to find new levers. Luna: What levers do they have? They've already done cost-cutting and portfolio simplification. Lucas: They're leaning into premiumization — selling more high-margin products like sk ii and Olay. They're also investing in digital marketing to improve ROI. But those are gradual improvements, not step changes. The dividend growth rate will likely stay in the 4 to 5 percent range for the next few years. Luna: So for an income investor, is that enough? Lucas: It depends on your time horizon. If you're retired and need current income, a 2.8 percent yield with 4 percent growth is okay. But you could get a similar yield from a money market fund right now with zero volatility. The reason to own PG is if you believe that 4 percent growth compounds over a decade and eventually outpaces short-term rates. Luna: That's a long-term bet. And it means you have to sit through weeks like this one. Lucas: And maybe months. The broader point is that dividend investing isn't just about picking the highest yield or the most famous name. It's about understanding the sustainability and growth trajectory of the payout. And right now, with rates elevated, the market is being more discerning. Luna: So if someone listening is holding PG and feeling nervous, what's the move? Lucas: I wouldn't sell PG in a panic. But I would ask: does this holding fit your income needs? If you need yield today, there are better options. If you're building long-term cash flow and you're comfortable with moderate growth, PG is still a core holding. But you should compare it to JNJ, which has a better payout ratio and slightly higher growth, or even to consumer staples ETFs that diversify the risk. Luna: And what about the broader rate environment? The Fed hasn't moved, but the 10-year yield is creeping up. Lucas: That's the elephant in the room. As long as the 10-year is above 4.5 percent, dividend stocks will face headwinds. But companies with strong free cash flow and a history of raising dividends should weather it. The ones that get crushed are the high-yield, low-growth names — the so-called yield traps. Luna: Speaking of which, we should mention that our show is supported by listeners like you. If these kinds of deep dives help you think about your portfolio, you can support us at buy me a coffee dot com slash fexingo. It's a simple way to keep the show ad-free and focused on the numbers. Lucas: Absolutely. And it's because of that support that we can take the time to compare payout ratios and growth trajectories instead of just reading headlines. So thank you to everyone who has contributed. Luna: Back to PG — one thing we haven't mentioned is the impact of currency. PG gets about 40 percent of its revenue outside the US. The dollar has been strong, which hurts reported sales and earnings. Lucas: That's a good point. The strong dollar is a headwind for all multinational consumer staples. In the most recent quarter, currency knocked about 2 percent off organic sales growth. That's another reason the market might be cautious. But it's a temporary factor — if the dollar weakens, that headwind becomes a tailwind. Luna: So there are multiple layers to this story. It's not just about the dividend. It's about earnings growth, currency, valuation, and the competitive landscape. Lucas: And that's why I think the 3 percent drop in PG is more interesting than a headline would suggest. It's a signal that the market is repricing a core holding based on a combination of factors. For dividend investors, that repricing creates an opportunity to reassess your own portfolio. Luna: Final thought — if you had to pick one metric to watch for PG going forward, what would it be? Lucas: Free cash flow conversion. If PG can maintain free cash flow above 90 percent of net income, the dividend is safe and growth will likely continue. If that ratio deteriorates, then the yield premium over Treasuries is not worth the risk.