Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Stocks Defy a 4.40 Percent Ten-Year Treasury
Transcript
- Lucas: So the ten-year Treasury is sitting at 4.40 percent, and dividend stocks are rallying. That feels backward if you learned the textbook version of this market. Luna: Right — higher bond yields usually suck money out of dividend payers. But look at Coca-Cola up almost 4 percent in the last five days, Johnson and Johnson up over 10 percent, Realty Income up over 4 percent. That's not a coincidence. Lucas: It's not. The textbook says that when risk-free yields rise, dividend stocks lose their appeal because you can get a similar yield from a government bond without the equity risk. But the ten-year has been in this range for weeks now — 4.40, 4.41, ticking down a basis point here and there. The market is adjusting to a 'higher for longer' reality, and some dividend stocks are actually benefiting. Luna: Because investors stop expecting rate cuts and start looking for yield that can grow. Bonds pay a fixed coupon. Dividends can increase. Lucas: Exactly. That's the key insight. A ten-year Treasury at 4.40 percent locks in that yield for ten years. But Coca-Cola has raised its dividend for 62 consecutive years. If you buy Coke at a 3 percent yield today, that yield on cost will be 4 percent in a few years, then 5 percent — the bond can't do that. So for long-term income investors, a dividend growth stock becomes more attractive relative to a bond when rates stop climbing. Luna: And that's exactly what we're seeing. Johnson and Johnson just raised its dividend after the Fed stress test cleared the banks. The stock is up 10 percent in a week. Lucas: Right, the stress test results gave a green light for capital returns across the sector, and JNJ — technically a healthcare company but with a huge financial services arm through its consumer health business — was able to hike its payout. That kind of news reinforces the narrative that dividend growth is alive and well. Meanwhile, the S&P 500 is down 1.6 percent over the same five days, and the Nasdaq is off 3.3 percent. Money is rotating out of growth and into income. Luna: The Dow is actually up 0.3 percent, which is telling. That index is heavy on dividend payers like Coke, JNJ, Procter and Gamble. Lucas: Exactly. The Dow is basically a dividend aristocrat index at this point. So the question for an income investor is: do you chase the highest yield, or do you prioritize dividend growth? Because those are two different strategies, and they perform very differently when rates are at 4.40 percent. Luna: Let's look at the ETFs. VYM, the Vanguard High Dividend Yield ETF, is down 0.1 percent in the last five days. SCHD, the Schwab US Dividend Equity ETF, is up 1.4 percent. DVY, the iShares Select Dividend ETF, is up 2.6 percent. Lucas: That spread tells a story. VYM screens purely for high yield — it holds stocks with the highest dividend rates. But many of those are companies that are struggling to grow, so their yields are high because their stock prices have fallen. SCHD and DVY both incorporate dividend growth and quality metrics. They're not just buying the highest yield; they're buying companies that can keep raising payouts. Luna: So the market is rewarding dividend growth over static high yield right now. That makes sense because if rates stay elevated, a company that can't grow its dividend becomes less attractive compared to a bond that pays a similar yield with less risk. Lucas: Right. And that's why Realty Income is up 4.2 percent. It's a triple-net lease REIT, so its rent checks are backed by long-term leases with built-in escalators. The dividend grows slowly but steadily. At 63 dollars and change, it yields about 4.8 percent — above the ten-year — and that yield is expected to grow 3 to 4 percent annually. That's a compelling package in a world where the ten-year is flat. Luna: What about a stock like Verizon? It yields over 6 percent, but it's only up 2.6 percent in the last five days. Less of a rally than JNJ or Coke. Lucas: Verizon is in the 'high yield but low growth' bucket. Its dividend growth has been anemic — they've raised the payout by about 2 percent annually in recent years. The market sees that as less sustainable if rates stay up, because the company carries a lot of debt from spectrum purchases and network buildout. So investors are willing to pay more for a stock like Coke that grows its dividend 5 to 7 percent annually, even if the starting yield is lower. Luna: So the takeaway for listeners building an income portfolio: don't just screen for the highest yield. Look at the dividend growth rate and the payout ratio. Lucas: Exactly. The payout ratio tells you how much of earnings are going to the dividend. Coke's payout ratio is around 75 percent, which is high but manageable because their earnings are stable. JNJ's is around 45 percent — plenty of room to keep raising. Realty Income's adjusted funds from operations payout ratio is about 75 percent as well. Those are all sustainable. Compare that to a company with a 90 percent payout ratio and no earnings growth — that dividend is at risk if the economy slows. Luna: And with the Fed still at 3.63 percent on the effective rate, and Kashkari saying he expects a rate hike this year, we're not out of the tightening cycle yet. Dividend growth stocks offer a buffer against that uncertainty. Lucas: They do. Because if rates go up, bond prices fall — you lock in a loss if you sell. But a dividend growth stock's price might dip, but the dividend keeps coming and growing. Over time, the income stream compensates for the price volatility. That's the whole philosophy behind dividend growth investing. Luna: It's also worth noting that the yield curve is still inverted — the two-year is at 4.09 percent, the ten-year at 4.40 percent, so the spread is 31 basis points. That's a classic recession signal. But dividend aristocrats tend to hold up better in recessions because they have strong balance sheets and essential products. Lucas: Right, consumer staples like Coke and PG sell toothpaste and soda regardless of the economic cycle. Healthcare like JNJ sells medicines and medical devices. Realty Income's tenants are mostly service-oriented retail and warehouses, which are relatively recession-resistant. So the same factors that make them good dividend growers also make them defensive holdings. Luna: So if someone is listening and thinking about where to put new money today, what's the framework? Lucas: I'd say three steps. One, identify your required income yield — how much cash flow do you need from your portfolio? Two, find stocks or ETFs that offer a starting yield close to that, but with a track record of dividend growth above inflation. Three, check the payout ratio to make sure the dividend is covered. If you do that, you're building a portfolio that can withstand a 4.40 percent ten-year because your income is growing. Luna: And if you want a simple starting point, SCHD or DVY give you that diversified dividend growth exposure in one ticker. Lucas: They do. And if today's conversation helped you think about your own portfolio differently, that's exactly the kind of useful thing we try to deliver here. The way we keep these episodes ad-free and focused on substance is through listener support. If you found value in it, you can buy me a coffee at buy me a coffee dot com slash fexingo. That helps us keep doing this. Luna: Absolutely. It's a small gesture that makes a big difference for us. And honestly, it keeps the show exactly how it is — no sponsors, no interruptions. Lucas: Alright, back to the yield curve. So the ten-two spread is 31 basis points, which is actually narrower than it was a month ago. That means the market is pricing in a higher probability of a recession, but also that long-term rates are not collapsing — they're staying elevated. That's a tricky environment for bonds, but for dividend growth stocks, it's actually a sweet spot. Luna: Because bond yields aren't rising fast enough to cause a selloff in equities, but they're high enough to keep yield-hungry investors interested in stocks that can grow their payouts. Lucas: Exactly. And that's the kind of environment where dividend aristocrats — the S&P 500 companies that have raised dividends for at least 25 consecutive years — tend to outperform. They're not exciting, but they compound reliably. And after a week where the Nasdaq dropped 3.3 percent, reliable compounding sounds pretty good. Luna: So to close it out: if you're building an income portfolio in June 2026, focus on dividend growth, not just yield. Look at Coke, JNJ, Realty Income, or ETFs like SCHD and DVY. And keep an eye on the payout ratio. Lucas: That's the playbook. Thanks for listening, and we'll talk next time.