Latest / Inflation and Your Money with Fexingo: Protecting Purchasing Power and Beating Inflation / Why Dividend Stocks Are Getting Crushed Right Now
Transcript
- Lucas: So the market has been sliding for a week — the S&P 500 down about four percent in five days, the NASDAQ down nearly seven. But there's a pocket getting crushed even harder, and it's the stocks people usually buy for safety. Luna: You're talking about dividend stocks, right? Because I was looking at the iShares Select Dividend ETF — it's down more than the S&P over that stretch. Lucas: Exactly. The Vanguard High Dividend Yield ETF, ticker V-Y-M, fell about five and a half percent last week. But the really brutal move is in gold miners — the GDX, which tracks gold mining stocks, dropped eleven and a half percent. Luna: Ouch. And gold itself was down four percent. So the miners got hit more than the metal. That's usually a sign that something beyond inflation expectations is going on. Lucas: Right. And the thing to understand is that dividend stocks are essentially long-duration assets. When you buy a stock for its dividend, you're buying a stream of future cash payments. The further out those payments are, the more sensitive the price is to interest rate expectations. Luna: So when the market shifts its view on when the Fed cuts rates — which it did last week — dividend stocks get repriced. Lucas: Exactly. And we got a couple of data points that pushed rate-cut expectations further out. The ten-year breakeven inflation rate — that's the market's expectation for average inflation over the next decade — dropped to two point three five percent. That's down from two point three six the day before. Tiny move, but the trend matters. Luna: So inflation expectations are cooling, but the Fed isn't cutting yet. That means real yields — the nominal yield minus expected inflation — are going up. Lucas: Bingo. The ten-year Treasury real yield has been climbing. And when real yields rise, bonds become more attractive relative to dividend stocks. Why take the risk of a stock that yields four percent when a risk-free Treasury is yielding close to the same, adjusted for inflation? Luna: That's the mechanism. But not all dividend stocks are created equal here. Some sectors are getting hit worse than others. Lucas: Yeah, let's break down the sectors. Utilities are down about six percent over the past week. REITs are down around five. Telecoms like AT&T and Verizon — down four to five percent. These are the classic 'bond proxies' — investors bought them for yield, and they're the most sensitive to rising real yields. Luna: Meanwhile, financials and energy — which also pay dividends — held up better. JPMorgan is only down about a percent. Exxon Mobil down maybe two. Lucas: That's because those sectors have something the bond proxies don't: pricing power and earnings growth tied to the real economy. Banks benefit from higher rates in the near term — their net interest margins expand. Energy companies benefit from still-elevated commodity prices. Luna: So the market is distinguishing between 'I bought this for the yield because rates are low' and 'I bought this because the company can grow its dividend through inflation.' Lucas: Exactly. And that's the distinction dividend investors need to make right now. A stock yielding five percent isn't automatically attractive if the dividend isn't growing and the real yield on Treasuries is competing. Luna: Speaking of that — let's talk about what's actually happening with dividends. Because companies haven't stopped raising them. Lucas: No, they haven't. In fact, first-quarter 2026 saw a record number of dividend increases among S&P 500 companies. The issue is valuation. Those increases were already priced in. The market is looking forward and saying, 'If the economy slows because rates stay higher for longer, those dividend growth rates might slow too.' Luna: And you see that in the price action. Stocks that cut or freeze dividends are getting hammered even worse. Walgreens, for example, cut its dividend earlier this year and the stock is down over thirty percent year to date. Lucas: Right. So the market is punishing dividend fragility. If you're a company with a high payout ratio — meaning you pay out a large chunk of earnings as dividends — and your earnings come under pressure, the dividend is at risk. Investors are fleeing those names. Luna: What about the gold miners? They pay dividends too, and they got crushed. Is that the same story? Lucas: Partially, but gold miners have their own dynamic. Gold fell four percent last week — that directly hits their revenue. But the bigger factor is that gold miners often have high operational leverage. A small drop in the gold price can mean a big drop in profit. And when the breakeven inflation rate falls, the inflation-hedge appeal of gold diminishes. Luna: So the whole inflation trade is getting unwound. Gold down, gold miners down, dividend stocks down. Lucas: That's the narrative. But I want to be careful here — the market isn't saying inflation is dead. CPI is still running at around three percent annualized. Core PCE is above two and a half. The Fed's preferred measure. So inflation is sticky. What changed last week was the market's expectation for when the Fed cuts. Luna: And that expectation got pushed out because the jobs report was strong, right? You mentioned earlier that the hot jobs report is stalling rate cuts. Lucas: Yeah, that was the headline. The May payrolls number came in above expectations, and the unemployment rate stayed low. So the market said, 'The Fed doesn't need to cut anytime soon.' And that repriced the entire yield curve. The two-year Treasury yield, which is the most sensitive to Fed policy, shot up. Luna: So for the dividend investor listening — what do you do? Do you sell your utilities and buy Treasuries? Lucas: I wouldn't make a panic move. But I think it's worth checking your exposure. If you own a dividend ETF that's heavy on utilities, REITs, and telecoms, you're essentially making a bet that rates will fall. If you believe rates stay here or go higher, that bet will continue to underperform. Luna: And if you want dividend growth, you might look at sectors where dividends are growing faster than inflation. Lucas: Right. Financials, energy, some tech — Microsoft raised its dividend ten percent this year. That's real growth. A utility raising its dividend two percent is barely keeping up with inflation. So the quality of the dividend matters more than the yield. Luna: One other thing I noticed — the selloff in dividend stocks seems worse in the names that are most leveraged. Higher debt loads become a bigger problem when rates stay high. Lucas: That's a great point. REITs, for example, have to refinance debt regularly. If their cost of capital goes up, their ability to grow the dividend goes down. Same with utilities that need to borrow for infrastructure projects. So the market is also pricing in higher refinancing risk. Luna: So the message is — dividend investing isn't a set-it-and-forget-it strategy anymore. You have to be active about which dividends you own. Lucas: It never really was, but the low-rate environment from 2010 to 2021 made it feel that way. Back then, any dividend stock looked good because bonds yielded nothing. Now, with the ten-year Treasury yielding around four and a half percent, you have to be selective. Luna: Quick honest thing — a lot of what we're able to talk about on this show, week after week, is because a small group of listeners chips in through buy me a coffee dot com slash fexingo. No ads, no sponsors, just people who find these conversations useful. Lucas: Yeah, and we really appreciate that. It lets us keep the show exactly the way we want — focused on what actually matters, without any outside pressure. So if you've gotten value from the episodes, that's the place to help keep it going. Luna: So back to dividend stocks — is there any signal you're watching that would tell you it's time to get back in? Lucas: The single most important one for me is the real yield on the ten-year Treasury. When that stops rising — or starts falling — the pressure on dividend stocks should ease. Because that's the competing asset. If real yields stabilize, dividend stocks can start to look attractive again. Luna: And what about the Fed? Do we need to see a cut? Lucas: Not necessarily. Just a pause in the repricing of rate expectations. The market doesn't need lower rates to buy dividend stocks; it just needs the expectation of lower rates to stop getting pushed out further. A stable rate outlook would be enough for income investors to come back. Luna: So we're watching the ten-year real yield and the two-year Treasury yield. Lucas: Exactly. And the CPI report coming out this week could be a big driver. If core inflation comes in softer than expected, that might be the catalyst. If it's hot, the selloff in dividend stocks could continue. Luna: Alright, so the takeaway: dividend stocks are getting crushed because real yields are rising, not because dividends are bad. The solution is to be selective — favor companies with pricing power and growing dividends over high-yield bond proxies. Lucas: That's the playbook. And if you're not sure which camp your holdings fall into, it might be worth a check. The market is making that distinction for you right now.