Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Investors Can Navigate a Hot Jobs Report
Transcript
- Lucas: So the May jobs report came out this morning, and it was a lot hotter than the consensus expected. Nonfarm payrolls blew past estimates by a decent margin. Luna: Yeah, I saw that. It essentially pushed the idea of a rate cut further out. Chair Warsh basically said as much in his remarks. Lucas: Right. And for dividend investors, this is a really interesting environment. Because if rates are staying higher for longer, that changes which dividend stocks work. Not all income is created equal when the two-year yield is above 4 percent. Luna: Exactly. So what's the play here? I mean, we've talked about utilities getting squeezed. But today I noticed some dividend stocks actually rallied. Lucas: Yeah, that's the key point. Let's look at Realty Income, ticker O. It's up over 2 percent in the last five days. That's a REIT that's been under pressure for months because of rate fears. But today it held up fine. Luna: That's interesting. Why would a REIT work when rates are rising? Usually that's a headwind. Lucas: Normally, yes. But the market is starting to differentiate. Realty Income has a very strong balance sheet, A-rated, and its tenants are mostly recession-resistant — grocery stores, drug stores, dollar stores. So if the economy stays strong, their rent collection stays strong. The market may be pricing in that the dividend is safe and growing. Luna: So the narrative shifts from 'rates are going up, REITs are bad' to 'the economy is strong enough to support these cash flows'. That makes sense. Lucas: Exactly. And then look at Altria, MO. It's up over 5 percent in five days. That's a high-yield name that's been written off by a lot of dividend growth investors because of declining cigarette volumes. But in this report, it's rallying. Luna: Right. And Altria's yield is still over 7 percent. So if the Fed isn't cutting, that yield looks more attractive relative to bonds? Because the 10-year is around 4.5 percent. Lucas: That's exactly the calculus. When the risk-free rate stops falling, the comparison becomes simpler. If you can get 7 percent from Altria with a dividend that, while not growing much, is at least stable for now, that spread is 250 basis points over the 10-year. That's a big cushion. Luna: And the jobs report suggests consumer spending is still holding up, which supports Altria's cash flow in the near term. Lucas: Right. Now contrast that with what's happening in the broader market. The NASDAQ is down over 5 percent in five days. High-growth, no-dividend stocks are getting hammered. So there's a rotation happening. Luna: Money is moving from tech into dividend stocks? That seems counterintuitive if rates are staying high. Usually growth gets punished but income stocks also suffer. Lucas: That's the conventional wisdom, but I think the nuance is that dividend stocks with pricing power and strong brands are actually doing well. Look at Procter & Gamble, up 4.5 percent in five days. Johnson & Johnson, up over 4 percent. These are dividend growers. Luna: So the market is rewarding dividend growth, not just high yield. Because if you're paying up for a stock like PG, you want to know the dividend will keep rising. Lucas: Exactly. And in a 'higher for longer' rate environment, the present value of future dividends is lower, so the market demands faster growth to justify the valuation. PG and JNJ deliver that. Altria doesn't, but its yield compensates. Luna: So which camp should a dividend investor favor right now? High yield or dividend growth? Lucas: I think it depends on your time horizon and tax situation. But if I had to pick, I'd lean toward dividend growth in this environment. Because if the economy stays strong, those companies can keep raising dividends. If it slows down, they have the balance sheet to maintain them. High yield is more vulnerable to a downturn. Luna: That's a good point. But Altria's move today suggests there's still appetite for yield, especially if you believe the economy is strong enough to support those payouts. Lucas: Right. And that's the debate. The market is pricing in a soft landing, not a recession. If that's correct, then high yield can work. But if the jobs report leads to more rate hikes, then high-duration stocks like utilities and some REITs could get hit again. Luna: So what's your takeaway for listeners today? How should they position their dividend portfolios? Lucas: I'd say focus on the quality of the dividend. Look at payout ratios, debt levels, and free cash flow coverage. In a strong economy, both growth and yield can work, but you want to avoid companies that are stretched. For example, Verizon is down almost 5 percent in five days. Its dividend is high, but its debt is high too, and the market is punishing that. Luna: So the market is getting more discriminating. It's not just 'yield is good' — it's 'sustainable yield is good'. Lucas: Exactly. And if today's conversation helped you think through that distinction, I'll just say — this show stays ad-free because of listener support. If you found value in this, you can help keep it going at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to make sure we keep doing episodes like this. No pressure, but if it's useful, that's the way to support it. Lucas: So to wrap up: the hot jobs report reinforces a 'higher for longer' rate outlook. Dividend investors should lean into quality — either through dividend growth stocks like PG and JNJ, or high-yield names with strong balance sheets like Realty Income. And keep an eye on the Fed's next move. Luna: Good advice. I'll be watching the two-year yield closely — if it keeps rising, that's a signal to stay defensive. Lucas: Same here. Thanks, Luna. Luna: Thanks, Lucas.