Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Stocks Are Weakening as Realty Income Falls
Transcript
- Lucas: Let's start with a number that jumped off the screen this morning: Realty Income, ticker O, down four percent over the past five trading days. That's a bigger drop than the S&P 500's gain of just under a percent, and it puts the stock at roughly sixty dollars. Luna: And that's a name a lot of income investors own as a core holding. What's going on? Lucas: Right, so Realty Income is a triple-net lease REIT, often called the 'monthly dividend company' because it pays every single month. Its current yield is around five point three percent, which sounds attractive when the ten-year Treasury is at four point four nine. But the market is basically saying that yield isn't enough to compensate for the risk of rising rates. Luna: And that's the puzzle — the ten-year has been climbing, up from four point four three earlier this month. So REITs, which are interest-rate sensitive, get repriced. Lucas: Exactly. The two-year yield is also up — four point two percent, from four point zero five. So the short end is rising faster than the long end, and the spread between them has narrowed to just twenty-seven basis points. That flattening yield curve is a warning sign for dividend stocks that rely on leverage or long-duration cash flows. Luna: And it's not just Realty Income. Verizon down five point seven percent, Johnson & Johnson down five point two. Those are big moves for defensive names. Lucas: They are. And the common thread is that all three are high-yield, high-debt, or both. Verizon carries a lot of debt from the spectrum auctions and network build-out. Johnson & Johnson has a triple-A credit rating, but it also has a huge pension liability and legal overhangs. When rates rise, the present value of those future liabilities increases, and the market penalizes the stock. Luna: So the market is differentiating. Not all dividend stocks are getting hit — Procter & Gamble is actually up half a percent over the same period. Lucas: That's the key insight. P&G's yield is lower, around two point four percent, but its business is less interest-rate sensitive. It has pricing power, strong brands, and a cleaner balance sheet. So investors are rotating out of the highest-yielding names into what they perceive as safer compounders. Luna: Which raises the question: is Realty Income's five point three percent yield a buying opportunity or a value trap? Lucas: That's exactly the debate. On one hand, Realty Income has raised its dividend for over twenty-five years and has a diversified tenant base. On the other hand, its cost of capital is rising. When it refinances debt, it'll be at higher rates. And the stock's total return has been negative this year, so the momentum is against it. Luna: And the broader market context matters too. The S&P 500 is at seventy-five hundred, up almost one percent in five days. The NASDAQ is up over two percent. So growth and tech are winning while income is losing. That's a classic rate-driven rotation. Lucas: Let's zoom out a bit. The Fed funds rate is at three point six three, effectively flat. But the market is pricing in higher rates ahead, partly because of the new Fed chair, Kevin Warsh, who's seen as more hawkish. That expectation is what's moving the two-year yield. Luna: And the thirty-year is at four point nine three, also flat. So the long end isn't budging as much. That tells me the market thinks inflation expectations are anchored, but the Fed might tighten more in the short term. Lucas: Right. And that's a bad environment for leveraged dividend payers. Realty Income's forward price to funds from operations is around fifteen times, which is not cheap historically. It traded at thirteen times during the 2022 rate-hiking cycle. So there could be further downside. Luna: What about the international dividend stocks we've talked about in previous episodes? Are they any better positioned? Lucas: It depends. European and Japanese dividend stocks have lower yields in many cases, but their central banks are still accommodative relative to the Fed. So they might hold up better. But currency risk is a factor — if the dollar strengthens, those dividends shrink in dollar terms. Luna: Which brings us back to the core question for the income investor: do you chase yield or do you prioritize dividend growth and safety? Lucas: And that's where a name like Procter & Gamble becomes interesting. It's not a high yielder, but its dividend growth track record is excellent, and it has consistently increased its payout for over sixty years. In a rising rate environment, that consistency gets rewarded. Luna: So the play might be to shift from the highest-yielding REITs and utilities into more defensive dividend growers. But that means accepting a lower current income. Lucas: And that's a trade-off every income investor has to make. But the data this week suggests the market is already making that decision for you. Realty Income, Verizon, Johnson & Johnson — they're all down more than the broad market. Meanwhile, P&G is up. The rotation is happening. Luna: If our money conversations have helped you think about a decision differently, that's exactly why we do this. We deliberately keep the show free of ads, and listener support is what makes that possible. Lucas: Yeah, it's a choice we've stuck with from day one. If you find value in these episodes and want to help keep them ad-free, you can support the show at buy me a coffee dot com slash fexingo. No pressure, just an option. Luna: Appreciate that. Okay, back to the numbers — let's talk about Verizon specifically. Down nearly six percent in five days. That's a big move for a stock that many hold for income. Lucas: Verizon now yields over five point six percent, which on the surface looks tempting. But the dividend payout ratio is over fifty percent of free cash flow, and that ratio has been creeping up. The company is spending heavily on fiber and 5G, and its debt load is substantial. Luna: So the dividend might be safe for now, but the stock price decline suggests the market is worried about future growth — or lack thereof. Lucas: Exactly. And with the ten-year Treasury at four point four nine, the risk premium that Verizon offers over a risk-free bond is only about one hundred ten basis points. Historically, that spread has been wider. So investors are saying 'I'd rather own the bond'. Luna: Same story with Johnson & Johnson. Down five percent, yield now three point three percent. But its business is more defensive, so the drop might be overdone. Lucas: Johnson & Johnson has the complexity of the talc litigation, though, which creates headline risk. But its pharmaceutical and medical device businesses are strong. I think the sell-off there is more about rates than fundamentals. Still, when the market is in risk-off mode for dividend stocks, even good names get caught up. Luna: So what's the takeaway for someone building a dividend portfolio right now? Do you wait for yields to stabilize, or do you start nibbling? Lucas: I'd say focus on the companies that can grow their dividends even if rates stay higher for longer. That means low payout ratios, strong free cash flow, and manageable debt. Names like Microsoft or Apple, which have started paying dividends, might be better anchors than the traditional high-yield plays. They offer growth and income. Luna: And if the Fed does eventually cut rates, those growers will also benefit from multiple expansion. So it's a win-win. Lucas: Right. The high-yield names like Realty Income and Verizon could bounce back, but they're fighting against the current of rising rates. Until that current changes, the market is likely to prefer quality over yield. Luna: We'll be watching the ten-year yield closely. If it pushes above four point five percent, we could see more pain for the high-yielders. Lucas: Absolutely. And if it reverses, that's the signal to start buying. But for now, the data says be selective. The dividend stock basket is not moving in unison — and that's actually a good thing for active investors.