Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Stocks React When the Yield Curve Steepens
Transcript
- Lucas: So the yield curve steepened again in late May, and I think a lot of dividend investors are wondering — is that good or bad for my portfolio? Luna: The spread between the 10-year and the 2-year Treasury widened to 42 basis points as of June 1st. That's up from 47 the week before — actually, wait, it narrowed slightly? Let me check. Lucas: You're right — it did narrow from 0.47 to 0.42 over that period. But the bigger story is that the 30-year yield ticked up to 4.99%, while the 3-month stayed flat at 3.69%. So the long end is still moving, and that steepening bias has been in place for weeks. Luna: Right. And for dividend stocks, the direction matters more than the level. A steeper curve often means the market expects stronger growth and maybe higher inflation down the road. Lucas: Exactly. And that creates a split in the dividend universe. On one side you have what I'd call 'bond proxies' — utilities, REITs, consumer staples with high yields. Think Realty Income, ticker O, or Procter & Gamble, ticker PG. Those stocks tend to get punished when long-term yields rise, because their dividends get discounted at a higher rate. Luna: And we saw that play out. O fell 3.2% in the past five days. PG dropped 4.5%. Even Coca-Cola, KO, was down 3.9%. Lucas: Meanwhile, the S&P 500 was up 1.2%. So these dividend stalwarts are clearly underperforming. But the other side of the coin is financials and cyclicals, which can actually benefit from a steepening curve. Luna: Because banks borrow short and lend long. A wider spread means better net interest margins. Lucas: Bingo. And it's not just banks — insurers, too. They hold long-duration bonds and reinvest premiums. When the curve steepens, their investment income gets a lift. So if you're a dividend investor, the question is: do you rotate, or do you hold tight? Luna: I think the answer depends on your time horizon. If you need income in the next year or two, those bond proxies still pay reliable dividends. O yields around 5.5% right now. PG yields about 2.4% but grows its dividend every year. Lucas: But if you're investing for total return over the next five years, you might want to tilt toward dividend growers in sectors that benefit from steepening. I'm thinking of banks like JPMorgan or regional banks that have been raising payouts. Or even some industrial dividend payers. Luna: One thing that surprised me: Verizon, VZ, only fell 0.3% over the past five days. That's a high-yield telecom, usually a bond proxy. Why didn't it sell off more? Lucas: Good observation. I think part of it is that VZ had already been beaten down. Its yield is pushing 6.5% now. At some point, the yield itself becomes a floor — income buyers step in. Also, the steepening might be signaling that the economy is stabilizing, which is good for telecom demand. Luna: So it's not a blanket sell-all-bond-proxies trade. You have to look at valuation and whether the dividend is sustainable. Lucas: Right. And that brings us to Altria, MO, which we talked about a couple episodes ago. It dropped 4.1% in the past five days. That's a 7.5% yield, but the dividend is under pressure from declining volumes. The steepening curve didn't cause that — it's a company-specific issue. Luna: So for dividend investors, the yield curve steepening is a signal to review your portfolio's interest rate sensitivity. Maybe trim positions in long-duration REITs and utilities that have run up, and add some financials or cyclicals with growing dividends. Lucas: Exactly. And I'd add one more thing: don't ignore the short end. The 3-month Treasury is still yielding 3.69%. That's competitive with many dividend stocks. So if you're holding a high-yield stock with a shaky dividend, you have a risk-free alternative that pays almost as much. Luna: That's a good yardstick. If a stock's dividend yield isn't significantly above 3.7%, and the dividend isn't growing, you're not being compensated for the risk. Lucas: And that's the core of dividend investing — it's not just about yield, it's about total return and risk-adjusted income. A steepening curve forces you to think about that more carefully. Luna: Speaking of thinking carefully, I want to circle back to something. We spend a lot of time on this show researching and breaking down these concepts, and we try to keep it ad-free. A couple of listeners have asked how to support us. Lucas: Yeah, we don't do sponsorships, so the show runs entirely on listener support. If you've gotten value from these episodes — maybe you've avoided a bad trade or found a better dividend stock — a few dollars a month genuinely makes a difference. It's buy me a coffee dot com slash fexingo. Luna: It's that simple. No perks or shout-outs, just knowing you're helping keep the show going for everyone. Lucas: Alright, back to the curve. So one practical takeaway: if you own a dividend ETF like VYM or SCHD, look under the hood. VYM has a big weighting in consumer staples and utilities. SCHD has more financials and industrials. That difference matters in a steepening environment. Luna: VYM was up 1.7% over the past five days, actually, while SCHD was down 0.6%. That's interesting — VYM outperformed despite its bond proxy tilt. Lucas: I think that's because VYM also holds a lot of energy and financials. The energy sector has been strong. So it's not a pure bond proxy ETF. Always check the sector breakdown before you make assumptions. Luna: Good point. So the curve steepening is a reminder to be active, not passive, with your dividend portfolio. Lucas: Exactly. Know your holdings, know their duration, and know whether the dividend is growing. That's how you navigate a shifting rate environment.