Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Investors Can Benefit from Yield Curve Steepening
Transcript
- Lucas: So the yield curve is doing something we haven't seen in a while, and I think dividend investors need to pay attention. The ten-year Treasury is at 4.56 percent, the two-year is at 4.13 percent — that spread is about 49 basis points now. That's not huge historically, but it's the steepest it's been since early 2024. Luna: Right, so the curve is steepening again, which is usually a sign that the market expects stronger growth or maybe higher inflation ahead. How does that change the game for dividend stocks? Lucas: Exactly. And the key is that not all dividend stocks react the same way. When the curve steepens, it tends to benefit companies with strong dividend growth — the ones that can raise their payouts consistently — because their future cash flows get discounted at a rate that's still relatively attractive compared to bonds. Procter & Gamble is a great example. PG is up 3.6 percent in the last five days alone, and it's yielding about 2.3 percent. That's not a high yield, but the dividend has grown for over 60 years. Luna: So the market is rewarding that reliability. What about the high-yield names? Altria, for instance — MO is down 1.6 percent over the same period. That's a 7.8 percent yield, but the stock is selling off. Lucas: Yeah, and that's the flip side. High-yield stocks, especially in sectors like tobacco or utilities, often behave more like bonds. When the ten-year yield rises — which it has, even if it's just a few basis points — the present value of their steady but slow-growing dividends gets hit harder. Plus, if the economy is actually strengthening, investors rotate into cyclical growth, and away from defensive high yield. Luna: So the steepener trade is basically: buy dividend growers, be cautious with high yielders. But is that a short-term call or something that could last? Lucas: I think it has legs for at least the next few months. The Fed is on hold — the effective fed funds rate is 3.64 percent and hasn't budged since April. But the market is pricing in maybe a cut later this year. If the ten-year stays above 4.5 percent while short-term rates drift lower, that curve keeps steepening. And historically, periods of steepening have been good for dividend growth ETFs like SCHD and VYM. SCHD is up 1.3 percent in the last five days, VYM up 1.0 percent. Luna: And DVY — the iShares Select Dividend ETF — is up 1.3 percent as well. That one focuses on high dividend yield, but it's also been screening for dividend consistency. So maybe even within high yield, there's a quality filter that helps. Lucas: That's a really good point. DVY rebalances annually and it's got a multi-factor approach — yield, payout ratio, dividend growth over five years. So it's not just blindly grabbing the highest yield. In this environment, that quality screen matters. If we look at the dividend discount model — and I know that sounds academic — but it's actually very practical. The model says a stock's value is the sum of all future dividends discounted back to today. When the discount rate — that's the ten-year yield plus a risk premium — goes up, stocks with distant, uncertain dividends get hit hardest. Stocks with near-term, growing dividends hold up better. Luna: So that explains why Johnson & Johnson, which has a 3.1 percent yield and a long growth streak, is up 1.4 percent. And Coca-Cola, with a 2.9 percent yield and 62 years of increases, is flat but not down. Meanwhile, Altria with its 7.8 percent yield but stagnant growth is getting sold. Lucas: Exactly. And that's the framework I want listeners to take away. Don't just look at yield. Look at the dividend growth rate and the payout ratio. If a company can grow its dividend at 6 to 8 percent a year, a 2.5 percent starting yield can actually compound into a much higher yield on cost over time. If a company has a 7 percent yield but zero growth, you're essentially getting a bond-like return with more risk. Luna: And the bond market is offering a 4.56 percent risk-free rate right now, so that 7 percent yield doesn't look as attractive when you factor in the risk of a dividend cut. Altria's payout ratio is over 80 percent, which is tight. Lucas: Right. So the practical step for someone building a dividend portfolio today: look at the dividend growth rate over the last five to ten years. If it's above inflation — say 5 percent or more — and the payout ratio is below 70 percent, that stock is well-positioned for a steepening curve. If the yield is high but the growth rate is low and the payout ratio is above 80 percent, that stock might struggle. Luna: And is there a specific valuation metric that helps identify which dividend growers are still cheap? Because PG isn't cheap at 26 times earnings. Lucas: That's where the dividend yield relative to its own history can help. PG's current yield of 2.3 percent is near the high end of its five-year range. So even though the P/E is elevated, the dividend yield suggests the stock isn't overvalued. Similarly, JNJ at 3.1 percent yield is above its five-year average of around 2.6 percent. So you're getting a better entry point. Luna: That's a good rule of thumb. If the yield is above its own five-year average, and the dividend growth is solid, that's a green light. What about Realty Income, which we've talked about before? O is yielding about 5.3 percent right now, but it's a REIT, so the dividend is more like a pass-through of rent income. Lucas: Realty Income is interesting. It's down 0.1 percent in the last five days, so basically flat. REITs are a mixed bag in a steepening curve because they tend to use debt financing. Higher long-term rates can increase their borrowing costs. But O has a very long track record of monthly dividends and a diversified portfolio. I think it's still a hold, but I wouldn't be adding aggressively here. Luna: So if someone is building a portfolio right now, late May 2026, what's the one move you'd suggest? Lucas: I'd tilt toward dividend growth ETFs or individual stocks with a proven growth record and a yield that's above their own historical average. SCHD is a solid core holding. Or if you want individual names, look at companies like Microsoft or Apple — they both pay dividends now and have been growing them rapidly. Microsoft yields under 1 percent, but the dividend has grown at a compound annual growth rate of about 10 percent over the last five years. That's the kind of growth that compounds beautifully. Luna: And for listeners who want a higher current income, what about something like Verizon? VZ yields about 6 percent and is up 0.9 percent in the last five days. Lucas: Verizon is a tricky one. The yield is attractive, but the dividend growth has been minimal — they've raised it by just 1 cent per share per year recently. The payout ratio is around 58 percent, which is fine. But in a steepening curve, I'd prefer a name that can grow the dividend faster. Still, for income-focused investors who need cash flow now, VZ is okay. Just don't expect much capital appreciation. Luna: That's a fair assessment. So the big picture: steepening yield curve favors dividend growers over high yielders. Check dividend growth rate, payout ratio, and current yield relative to history. Any other data points to watch? Lucas: Keep an eye on the two-year yield. If it continues to fall while the ten-year stays steady, that's a clear steepener signal. Also watch the Fed's language. If they signal a cut, that could steepen the curve further. And look at the Russell 2000 — it's up 3.6 percent in the last five days, which suggests small caps are benefiting from the steepener too. That's often a sign that the market expects stronger growth. Luna: And that's actually a really good segue. Because we talk about dividends, and people think large caps, but there are small cap dividend payers too. The Russell 2000's move might be a signal that those smaller dividend growers are also worth a look. Lucas: Absolutely. Small cap dividend stocks often get ignored, but some of them have strong dividend growth stories. The key is to do the same analysis: check the dividend growth rate, payout ratio, and yield relative to history. And if the economy does pick up, those small caps could outperform. Luna: Before we wrap up, I want to mention something that helps us keep these conversations coming. If you find value in our dividend investing discussions, a small amount of listener support goes a long way to keeping the show independent and ad-free. It's buy me a coffee dot com slash fexingo. Just a couple of bucks a month genuinely makes a difference. Lucas: Yeah, it really does. We don't run ads, and that's because of listeners who chip in. So if you've gotten something out of the show, that's the place. And back to the strategy — I think the key takeaway is that the yield curve is giving us a clear signal right now. Dividend growers are the place to be, and there are good entry points in names like JNJ and PG. Luna: And even in ETFs like SCHD, which gives you diversified exposure to that growth factor. So as always, do your own research, but the framework we talked about today is a solid starting point. Lucas: Exactly. Next time, we might dig into how to actually calculate that dividend growth rate and screen for it. But for now, I think that's a good place to leave it. Thanks for listening.