Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Stocks Survive a Steepening Yield Curve in July 2026
Transcript
- Lucas: So the ten-year Treasury yield hit four point four four percent on Tuesday, the highest close we have seen since late May. And the spread over the two-year widened to thirty basis points, up from twenty-eight the day before. That is a deepening steepening move, and it is reshaping which dividend stocks are working and which ones are getting hammered. Luna: Verizon dropped almost nine percent in five days. That is brutal for a stock people own specifically for income. Lucas: Exactly. And the contrast with something like Coca-Cola or Johnson and Johnson is instructive. Coke is up one point one percent over the same stretch, and J and J is up three point seven percent. All three are dividend payers, but the market is treating them completely differently right now. Luna: So the question is: why does a steeper curve hurt Verizon but help J and J? Lucas: It comes down to two things: leverage and the nature of the business. Verizon carries a lot of debt, about one hundred and fifty billion dollars. When long-term rates rise, their interest expense goes up, and that puts pressure on free cash flow and the dividend safety. Plus, telecom is capital intensive, they are always spending on spectrum and infrastructure. So higher rates squeeze them from both sides. Luna: And the dividend yield on Verizon was already above six percent before this drop. A high yield can sometimes be a warning sign that the market doubts the payout. Lucas: Right. Now compare that to Johnson and Johnson. They have a triple-A credit rating, very manageable debt, and their business is defensive. People keep buying medical devices and pharmaceuticals regardless of the rate environment. So when the curve steepens, which historically signals stronger economic growth ahead, a company like J and J actually benefits because their pricing power holds up. Luna: And Coca-Cola is similar. They have a global brand, predictable cash flows, and a dividend that has grown for over sixty years. The yield is only about three percent, but the growth rate is consistent. Lucas: That is the key distinction we keep coming back to on this show: dividend growth beats raw yield in a rising rate environment. The market rewards companies that can increase their payouts over time because that signals earnings stability and pricing power. A high starting yield that does not grow is often a trap. Luna: So what about the dividend ETFs? VYM is down a bit, SCHD is flat to slightly down, DVY is essentially unchanged. They are not getting crushed, but they are not rallying either. Lucas: That is because these ETFs hold a mix of stocks. VYM, the Vanguard High Dividend Yield ETF, has a heavy weighting in financials and utilities, which are sensitive to rates. SCHD, the Schwab U.S. Dividend Equity ETF, leans more toward industrials and consumer staples, so it is a bit more resilient. DVY, the iShares Select Dividend ETF, has a value tilt that includes some beaten-down sectors. Luna: And the overall market is actually up. The S&P 500 gained one point seven percent in the past five days, the Dow is up, the NASDAQ is up two point seven percent. So dividend stocks are lagging the broad market. Lucas: They are, but that is not unusual when rates are rising. The rotation out of defensives and into growth makes sense if the curve steepening is driven by better economic expectations. The question is whether this steepening is sustainable or just a temporary repricing. Luna: The Fed funds rate is still flat at three point six three percent. And the three-month Treasury is at three point eight seven percent. So short-term rates are not moving; it is all happening at the long end. Lucas: That is what makes this interesting. The curve steepening is not because the Fed is hiking. It is because the market is pricing in either higher inflation expectations or stronger growth — or both. And for dividend investors, the right response is to focus on companies that can pass through cost increases and grow their earnings per share. Luna: So which dividend stocks actually benefit from this environment? You mentioned financials earlier. Lucas: Banks are the classic beneficiary of a steepening curve. They borrow short-term and lend long-term, so a wider spread expands their net interest margin. But we have to be careful here — not all banks are created equal. Regional banks with large commercial real estate exposure still face headwinds. The big money-center banks like JPMorgan are better positioned. Luna: And insurers? They hold a lot of bonds in their portfolios. Rising long-term yields mean their new money gets reinvested at higher rates. Lucas: Exactly. Life insurers and property-casualty insurers with strong underwriting margins can see their investment income improve. But again, you have to look at the individual company. A steepening curve is a tailwind, but it is not a magic wand. Luna: What about utilities? They are usually considered bond proxies because of their stable dividends, but they have been under pressure. Lucas: Utilities are getting hit because they are highly leveraged and their regulated returns are tied to allowed ROEs that do not adjust quickly when rates rise. So the dividend looks less attractive compared to a risk-free ten-year yielding four point four four percent. The same dynamic applies to real estate investment trusts, though we saw Realty Income hold up okay, up zero point one percent over five days. Luna: That might be because Realty Income has a high-quality portfolio and a long track record of dividend growth. But generally, REITs are sensitive to rates. Lucas: Right. So the takeaway for this episode is: if the curve continues to steepen, you want dividend growers with low leverage, strong pricing power, and a history of raising payouts. Avoid high-yield stocks with shaky balance sheets, especially in telecom and utilities. Luna: And that is exactly the kind of framework that makes these conversations useful. I mean, if this episode helped you think about your own portfolio, even a little, that is the goal. Lucas: And if it was worth a coffee to you, you know where to find us. It is buy me a coffee dot com slash fexingo. No pressure, just a way to keep this show ad-free and focused on what matters. Luna: Yeah, that is the only ask we ever make. And it keeps us independent. Lucas: So back to the data: the ten-year yield at four point four four percent, the curve at thirty basis points — that is a real shift. And the market is still digesting it. We will watch how dividend stocks respond over the next few weeks, especially if we get more economic data that confirms growth is accelerating. Luna: And if inflation picks up again, that could change the calculus. But for now, the playbook is clear. Lucas: Exactly. Dividend growth over yield, quality over leverage, and always check the payout ratio. Speaking of which, we did an episode on payout ratios recently — episode eighty-four. If you missed it, it pairs well with today's discussion.