Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / When Dividend Growth Lags the S&P What to Watch
Transcript
- Lucas: So it's May 21, 2026, and the S&P 500 is basically flat this week — down about nine-tenths of a percent over five days. The Dow is barely moving. But dividend stocks? They've had a slightly different week. Vanguard's High Dividend Yield ETF, VYM, is down a touch, but Schwab's dividend ETF, SCHD, is up a percent. And the Dow Jones Select Dividend Index ETF, DVY, is up half a percent. Luna: So not all income plays are moving together. That actually raises a question I've been hearing from listeners: in a market that's treading water, is a high current yield more important, or is dividend growth the real priority? Lucas: That's the exact tension I want to dig into. Because look at the ten-year Treasury — it's yielding about 4.67 percent now. That's up from 4.61 just a few days ago. So the risk-free rate is offering a pretty solid nominal income stream. Which means dividend stocks have to earn their place in a portfolio. You can't just buy any stock yielding 3 percent and call it a day. Luna: Right. The bar is higher. Let's look at a concrete case. Johnson & Johnson — JNJ. It's down about half a percent over the past five days, sits around $229. It yields roughly 3.2 percent. But the dividend growth story has slowed. Lucas: Exactly. Johnson & Johnson has raised its dividend for 62 consecutive years. That's elite. But over the last five years, their dividend growth rate has averaged under 5 percent. Compare that to the 2010s, when they were routinely raising it 7-plus percent. The company is dealing with the talc litigation overhang, the consumer health spin-off, and a more conservative payout philosophy. Luna: So you get a 3.2 percent yield and a 4 to 5 percent annual raise. That's a total income return of about 8 percent before you even consider price appreciation. But is that enough when inflation has been sticky? Lucas: That's the million-dollar question. The Fed's latest minutes showed officials are still worried about inflation staying elevated. They haven't ruled out a rate hike. So if you're holding JNJ, your real purchasing power from the dividend is only growing at maybe 2 to 3 percent annually after inflation. That's not nothing, but it's not exactly compounding wealth. Luna: Let's compare with Procter & Gamble. PG is yielding about 2.4 percent — lower than JNJ. But over the last five years, PG's dividend growth has been around 6 percent annually. So the starting yield is lower, but the growth trajectory is better. Which one wins over time? Lucas: It depends on your time horizon. If you're a retiree needing cash flow now, JNJ's higher current yield is more attractive. But if you're a 40-year-old building a dividend portfolio for the next 20 years, PG's faster growth might leave you with more income later. I actually ran a quick model. Assuming both maintain their respective growth rates, PG's dividend would surpass JNJ's in dollar terms around year 12 or 13. Luna: That's a great data point. And this is why I think listeners should look at dividend growth rate as a screening metric, not just yield. There are a lot of high-yield stocks that have stagnant or even shrinking dividends — and those are essentially bonds with equity risk. Lucas: Right. And that brings us to the ETFs. VYM yields about 3.1 percent right now. It's heavily weighted toward financials and consumer staples. But its dividend growth rate as a portfolio has been modest — around 4 percent annually. SCHD yields about 3.5 percent but has a stronger growth rate, closer to 6 percent, because it screens for dividend growth and quality. DVY yields over 3.7 percent, but its growth is weaker — maybe 3 to 4 percent — because it's more yield-focused. Luna: So SCHD seems to strike a better balance. And it's up on the week, while VYM is slightly down. The market might be rewarding that approach right now. Lucas: Possibly. But I want to be careful not to extrapolate one week of data. What I think is more important is that in a flat market with rising Treasury yields, dividend growth becomes a key differentiator. Stocks that can grow their payouts at 6 to 8 percent annually will likely see their share prices hold up better because the income stream is increasing faster than inflation and faster than the risk-free rate. Luna: Let's talk about a stock that might fit that profile. Altria — MO — is yielding over 5 percent, and it's up 1.3 percent this week. But its dividend growth has been very slow — only about 2 to 3 percent a year recently because of declining cigarette volumes. Lucas: Yeah, Altria is a yield trap if you're not careful. That 5 percent yield looks great, but if the dividend is barely growing and the underlying business is shrinking, you could see capital erosion over time. The total return might be worse than a lower-yielding growth stock. Meanwhile, Verizon — VZ — yields about 5.8 percent and is up 1.6 percent this week. Its dividend growth has been around 2 percent annually. Same tension. Luna: So what's the framework for a listener who wants to build an income portfolio today? Do you go for yield, growth, or a mix? Lucas: I think the smart move is to own both buckets but with a tilt toward dividend growth if your time horizon is longer than five years. Let me give you a simple rule of thumb: look for stocks with a payout ratio under 60 percent, a dividend growth rate above the rate of inflation, and a yield that's at least 2 percent. That's your sweet spot. Procter & Gamble fits. Johnson & Johnson fits too, even with slower growth, because its payout ratio is still reasonable at around 50 percent. Luna: And if today's episode was useful to you and you want to keep it ad-free, buy me a coffee dot com slash fexingo helps. That's literally what funds these conversations. Lucas: Yeah, listener support makes this possible. So back to the framework — the key metric I'd watch is the five-year dividend CAGR. If it's below 4 percent and the yield is above 4 percent, you're probably taking on more risk than you realize. That's a warning flag. Luna: Are there any sectors that look particularly attractive for dividend growth right now? Lucas: I'd point to financials. Banks have been raising dividends aggressively after the stress tests and higher net interest income. But you have to be careful with regional banks — some are still dealing with commercial real estate exposure. I'd stick with the big money-center banks like JPMorgan, which has a strong dividend growth record and a yield around 2.5 percent. Luna: Energy is another one. Many oil majors have been increasing dividends after the recent earnings. But that's cyclical — you have to watch oil prices. Lucas: Absolutely. And that's the thing about dividend growth — it's not a set-it-and-forget-it strategy. You need to monitor the payout ratio and free cash flow every quarter. A dividend cut can erase years of compounding. So I always recommend keeping a watchlist of 20 to 30 stocks and reviewing them quarterly. Luna: Last question — what about Coca-Cola? KO is yielding about 2.9 percent, up 1.4 percent this week. Its dividend growth has been around 4 to 5 percent. How does it compare? Lucas: Coca-Cola is a classic example of a steady grower. It's raised its dividend for 63 straight years. The growth rate has slowed a bit, but it still compounds nicely. It's a solid core holding for an income portfolio. On a risk-adjusted basis, it's probably a better bet than a high-yield stock like Altria. Luna: So to sum up for our listeners: don't just look at yield. Look at the five-year dividend growth rate, the payout ratio, and the business fundamentals. And if you're building a portfolio, think about anchoring it with stocks like JNJ, PG, and KO, then adding some higher-yield names if you need more income now. Lucas: Exactly. And remember — in a world where the ten-year is yielding 4.67 percent, your dividend stocks need to earn their keep. A stock that grows its dividend at 6 percent with a 2.5 percent starting yield is going to beat a stock with a 5 percent yield that never grows. It's the compounding that matters over the long run.