Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend ETFs Absorb Rising Bond Yields in July 2026
Transcript
- Lucas: So the ten-year Treasury yield pushed to 4.48 percent as of July 1st, and you'd think dividend ETFs would be getting crushed. But VYM, SCHD, DVY — they're all up over the past five days, between 0.6 and 0.9 percent. Luna: That's not nothing when bonds are offering a real yield above two percent for the first time in years. What's propping them up? Lucas: It's two things. First, the sectors that dominate these ETFs — consumer staples, healthcare, utilities — they have pricing power and steady cash flows. Coke, Procter & Gamble, Johnson & Johnson. Those names have been gaining. Coke up 1.8 percent in five days. PG up 1.6 percent. JNJ up 3.3 percent. Luna: And they've all been raising dividends consistently. That's the second thing, right? Dividend growth is the buffer. Lucas: Exactly. When the ten-year moves from 4.44 to 4.48, the initial shock is that income investors could just buy Treasuries. But a Treasury doesn't grow its payout. Coke has increased its dividend for 63 consecutive years. That compounding is irreplaceable. Luna: So the dividend ETFs that screen for dividend growth and quality — SCHD is a classic example — they're basically designed to hold up in this environment? Lucas: That's the thesis. SCHD's methodology weights by dividend yield, but also by return on equity and dividend growth rate. So you end up with companies that generate real cash, not just high yield. Its top holdings include Coke, PG, and Texas Instruments. Those names are up this week. Luna: Meanwhile, Verizon is down 8.6 percent in five days. That's a high-yield name that was a favorite for income investors. What happened there? Lucas: Verizon's yield was around 6.5 percent before this drop, which is screaming 'risk.' Their payout ratio is over 100 percent of free cash flow. When rates rise, the market punishes companies that can't organically fund their dividend. Verizon has to borrow or cut capex to pay it. Luna: So the spread between a safe 4.48 percent Treasury and a risky 6.5 percent dividend isn't that attractive when you factor in potential dividend cuts. That makes sense. Lucas: Right. And that's why VYM, which holds a broader basket of high-dividend stocks, still has a lot of financials and utilities that are better positioned. Financials benefit from a steepening yield curve, and utilities have regulated revenues and lower payout ratios than telecom. Luna: The yield curve has been steepening. The ten-year minus two-year spread is now 35 basis points, up from 31 a few days ago. That helps banks, which earn on the spread. Lucas: It does. And that's part of why dividend ETFs are holding up. They're not monolithic. Inside VYM, the financial sector weighting is about 18 percent. Those stocks are actually gaining as the curve steepens. So you get a natural hedge. Luna: But not all dividend ETFs are equal. DVY, which focuses on the highest dividend yields in the Dow Jones U.S. Index, has a heavier tilt toward telecom and utilities. It's up only 0.6 percent, lagging VYM and SCHD. Lucas: That's the trade-off. You chase yield, you get more Verizon-type risk. DVY's yield is around 3.8 percent, versus VYM's 2.9 percent. But in a rising rate environment, that extra yield may not compensate for the volatility. Luna: So what's the takeaway for someone building a dividend portfolio today? Stick with dividend growers over pure high yield? Lucas: I think so. Look at the data from this week. The ten-year went up four basis points, and the S&P 500 gained 1.8 percent, the Dow gained 2 percent. Stocks are absorbing rate moves when the economy is still growing. Dividend growers participate in that. Luna: And the ones that are cutting or have unsustainable payouts — like Verizon — they get left behind. It's a sorting mechanism. Lucas: Exactly. The market is rewarding quality. And that's a trend we're seeing across asset classes. Even within dividend ETFs, the ones with stricter quality screens are outperforming. Luna: You know, it's funny. We talk about this stuff every day, and it's easy to forget that not everyone has access to this kind of analysis. That's part of why we keep the show ad-free. Lucas: Yeah, and we hear from listeners who say that the framework we lay out — thinking about payout ratios, dividend growth, sector exposure — actually helps them make real decisions with their own money. That's the whole point. Luna: If you find value in these conversations and want to help keep them independent, the best way is to support us at buy me a coffee dot com slash fexingo. It really does make a difference. Lucas: It does. And we don't run ads, we don't take sponsors that might influence what we cover. So listener support is what keeps this going. Luna: Alright, back to the numbers. One thing I'm watching is the thirty-year yield at 4.97 percent. That's getting close to five percent. If it breaks above, do dividend stocks start to crack? Lucas: They might, if the move is driven by inflation expectations rather than real growth. But right now, the steepening is mostly about a stronger economy. The Fed is on hold at 3.63 percent, the labor market is still tight, and corporate earnings are coming in okay. Luna: So dividend ETFs could continue to hold up as long as the economy doesn't tip into recession. But if rates spike because of inflation, then dividend stocks — especially the ones with longer duration — would take a hit. Lucas: That's the risk. A dividend stock is essentially a perpetuity. Higher discount rates lower the present value of future dividends. So if the ten-year goes to five percent, you'd expect multiples to compress. But the dividend growth stocks have a compensating factor: their future dividends are expected to be higher. Luna: Right. So a stock like Coke, with a 3.2 percent yield and a 5 percent dividend growth rate, offers a total return expectation that a bond can't match. The bond gives you a fixed 4.48 percent, no growth. Lucas: And that's the crux of it. For long-term income investors, dividend growth is a feature, not a bug. As long as the payout ratio is reasonable and free cash flow covers it, the stock can absorb rate increases better than a high-yield name with no growth. Luna: So maybe the real lesson for July 2026 is: don't panic when yields rise. Check whether your dividend stocks are growers or just high yielders. If they're growers, you might be fine. Lucas: I think that's a fair summary. And we'll keep watching the ten-year. If it breaks 4.50, we'll come back and revisit. Luna: Sounds like a plan.