Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Stocks Survive a Flat Fed With No Rate Cuts
Transcript
- Lucas: The Federal Reserve has now held rates flat for over a year — the effective fed funds rate has been stuck at 3.63 since June of last year. And with oil pushing past 100 dollars and rate-hike odds suddenly creeping up, I think dividend investors need to ask a very specific question: which stocks actually work when the Fed refuses to cut? Luna: That feels like the central tension of July 2026. The market is hoping for easing, but the data — oil, the 10-year Treasury climbing to 4.67 — it's pushing the other way. Lucas: Exactly. And the 10-year yield has moved from 4.63 to 4.67 just in the past few days. The 2-year is up too, at 4.31. So the curve is steepening slightly, but the absolute level of rates is high and flat. That's a tough environment for high-yield stocks that borrowed cheap and now have to refinance. Luna: So where do you start? Because the broad market has been choppy — S&P 500 down 0.7 percent in five days, the Dow off 0.8. Not catastrophic, but not exactly a tailwind for dividend stocks either. Lucas: Right. I want to look at two stocks that tell opposite stories right now. Realty Income, ticker O — the monthly dividend REIT — is down 1.5 percent over the past five days, trading around 64.72. And Johnson & Johnson, ticker J-N-J, is up 2.5 percent, at 259.27. Luna: J&J up, Realty Income down — that's interesting because both are considered defensive, steady payout stocks. Lucas: They are, but the difference is bond sensitivity. Realty Income is a triple-net lease REIT. Its tenants sign long leases with rent escalators, but the stock trades almost like a bond. When the 10-year yield rises, the present value of those future rents falls, and the stock drops. That's exactly what we're seeing. Luna: So even though Realty Income has raised its dividend for over 100 quarters, the share price is getting punished by the yield move. That's the flat-rate trap — the dividend yield might be attractive, but the total return suffers. Lucas: Exactly. Realty Income's dividend yield is now around 5.5 percent based on the current price. That looks juicy. But if the stock is falling, you're losing principal. And with rates flat, there's no catalyst for the price to rebound unless the Fed signals a cut. Luna: Meanwhile, J&J has a much lower beta — around 0.5 — and its payout ratio is about 45 percent. So when rates go up a few basis points, the stock barely budges. Lucas: And J&J's dividend yield is only about 3.1 percent — lower than Realty Income — but the growth is consistent. They've increased their dividend for 63 consecutive years. In a flat-rate environment, that compounding matters more than starting yield. Luna: So you're saying that in a flat or potentially rising rate environment, dividend growth beats high yield? Lucas: For total return, yes, I think so. Let me put a number on it. If you own a stock yielding 5.5 percent with no dividend growth, and the price stays flat, your total return is 5.5 percent. If you own a stock yielding 3.1 percent but growing the dividend by 6 percent a year, in five years your yield on cost is over 4 percent, and your total return — including price appreciation — is likely higher, especially if the stock has pricing power and a strong balance sheet. Luna: That makes sense. But what about the broader dividend ETF picture? VYM — the Vanguard High Dividend Yield ETF — is up 0.7 percent over five days, while SCHD — the Schwab U.S. Dividend Equity ETF — is down 0.3. That's a split. Lucas: It shows that not all dividend strategies are created equal. VYM is more value-oriented, with heavy weights in financials and energy — sectors that benefit from higher rates. SCHD has more consumer staples and healthcare, which are more rate-sensitive on the growth side. So which one wins depends on whether you think rates stay flat or go up. Luna: And the headlines this morning are leaning toward rates going up. 'Odds of Federal Reserve rate hike surge as oil prices rip higher' — that's a direct quote from CNBC. Lucas: That changes the calculus. If the Fed actually hikes, then high-duration stocks — like REITs and utilities — could get hit harder. But stocks with low debt, high margins, and pricing power, like J&J or Procter & Gamble — even though PG is down 2 percent this week — those are the ones that can absorb a 25-basis-point hike without cutting the dividend. Luna: Procter & Gamble down 2 percent this week — is that just a blip, or is there something structural? Lucas: I think it's noise. PG has a payout ratio around 60 percent, and they've raised the dividend for 68 consecutive years. One down week doesn't change the thesis. But it does remind you that even the best dividend stocks are not immune to market moves. The key is whether the dividend itself is safe. Luna: So how do you tell if a dividend is safe in this environment? Payout ratio is the obvious one, but are there other markers? Lucas: Free cash flow coverage is huge. Can the company pay the dividend out of free cash flow, not just earnings? Because earnings can be manipulated, but cash is real. For J&J, free cash flow covers the dividend about 2.5 times. For Realty Income, it's about 1.2 times — still safe, but tighter. Luna: And with rates flat, the cost of debt isn't going down for these companies. So if they have variable-rate debt or need to refinance soon, that cash flow coverage could shrink. Lucas: Exactly. That's why I'd rather own a company with a low payout ratio, low debt, and a wide moat — even if the starting yield is lower. In a flat or rising rate environment, that combination gives you both safety and growth. Luna: So what's the takeaway for someone listening who has a dividend portfolio right now? Should they be swapping out high-yield REITs for low-yield growers? Lucas: Not necessarily swap — but tilt. If you have a core position in a high-yield REIT like Realty Income, don't panic-sell. But if you're adding new money, I'd steer it toward stocks with dividend growth, strong free cash flow, and low beta. Think J&J, Microsoft, PepsiCo — names that have pricing power and a history of raising dividends through all rate environments. Luna: And what about the ETFs? SCHD has a lot of those quality names. VYM is more yield-focused. Which one do you prefer right now? Lucas: I'd lean SCHD for the growth tilt. But I'd also look at the expense ratio and turnover. VYM has a 0.06 percent expense ratio, SCHD is 0.06 as well — both cheap. The real difference is the screening methodology. SCHD screens for dividend growth and quality, VYM screens for yield. In a flat rate environment, growth wins. Luna: That's a really clear framework. And I think it's helpful for listeners who are looking at their portfolios and wondering whether to make a move. Lucas: By the way, if this kind of analysis — looking at actual data, comparing specific stocks, thinking through the Fed's impact — is useful to you, I'll mention that our show stays ad-free thanks to listener support. If you'd like to help keep these conversations going, you can find us at buy me a coffee dot com slash fexingo. No pressure, but it genuinely helps us keep the pod independent. Luna: And it's a small way to say, 'Hey, this is worth my time,' which we always appreciate. Lucas: Back to the market — I think the key number to watch this week is the 10-year yield. If it breaches 4.70, you'll see more pain in interest rate sensitive dividend stocks. But if it holds around 4.65, the flat-rate environment continues, and the case for dividend growth stocks gets stronger. Luna: So watch the bond market, not just the stock tickers. That's the real signal for dividend investors right now. Lucas: Exactly. Dividends are a long game, and the current rate environment is testing which companies can really deliver. I'd rather own the ones that have been raising payouts for decades than chase a yield that could evaporate if rates move one more time.