Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Stocks Survive a Hawkish Fed Chairman
Transcript
- Lucas: So the 10-year Treasury yield has climbed back to 4.49 percent as of this week, and the market is still digesting Chairman Warsh's tone from the last FOMC meeting — several members signaled a possible rate hike later this year. For dividend investors, that raises an immediate question: which stocks can actually keep paying you reliably when the Fed is leaning hawkish? Luna: And we're not talking about just any stocks. The ones that get punished first in a rising-rate environment are usually the highest-yielding names with shaky payout ratios. So where do you even start looking? Lucas: You start with the dividend aristocrats — specifically the ones with pricing power. Take Coca-Cola, ticker symbol K-O, trading around 79 dollars today. It yields about 3 percent, which isn't eye-popping, but its payout ratio is comfortably below 80 percent and it's raised its dividend for 62 consecutive years. Luna: Sixty-two years. That includes the 1970s inflation spiral, the 2008 financial crisis, and the pandemic. So the question isn't whether they'll cut — it's whether they can keep growing the dividend when the cost of debt is higher. Lucas: Right, and that's where the Warsh dynamic matters. Coca-Cola has very little debt on its balance sheet relative to earnings, so rising borrowing costs don't really squeeze its free cash flow. The bigger risk is if consumer spending slows — but even then, soda is a low-ticket purchase. People don't stop buying Coke because rates go up. Luna: Same logic applies to Johnson & Johnson, ticker J-N-J, at 228 dollars. It yields about 2.8 percent, but the dividend growth rate has averaged over 5 percent annually for the last decade. And with healthcare demand being relatively inelastic, the earnings stream is stable. Lucas: Exactly. Johnson & Johnson has a payout ratio around 60 percent, so there's plenty of room to keep raising even if earnings growth slows to 3 or 4 percent. The real danger in a hawkish Fed environment is for companies that are paying out 90 percent or more of earnings — they have no cushion if profit margins get squeezed. Luna: And that brings us to a name like Realty Income, ticker O, which is a triple-net lease REIT. It currently yields about 5.7 percent, but its payout ratio as a REIT — measured by funds from operations — is around 80 percent. That's not alarming, but it's higher than the aristocrats we just mentioned. Lucas: Realty Income is a great case study because it's a favorite for income investors chasing yield. But when the 10-year Treasury is at 4.49 percent, a 5.7 percent yield from a REIT doesn't look as generous — and the stock has been under pressure, down a bit year-to-date. The risk is that if rates keep rising, the stock could fall further, offsetting the dividend income. Luna: So the approach here is to favor companies where the dividend growth rate exceeds the risk-free rate by a clear margin, and where the payout ratio gives you confidence even if the economy slows. That's a very different screen from just sorting by highest yield. Lucas: Exactly. And there's another trend we're seeing in June 2026 that supports this: dividend ETFs are rotating into mid-cap stocks. The iShares Select Dividend ETF, ticker D-V-Y, has increased its mid-cap allocation by about 5 percentage points over the last quarter. Mid-caps tend to have higher dividend growth rates than large caps, but with less volatility than small caps. Luna: And the Russell 2000 — the small-cap index — is actually down about 0.9 percent over the last five days, and the NYSE composite is also slightly negative. So the rotation out of small caps into mid-caps makes sense if you're looking for yield without taking on too much rate sensitivity. Lucas: Let's pause on that for a second. If our conversations about money have helped you think about a decision differently — whether it's which stocks to hold in a rising-rate environment or how to evaluate a payout ratio — we'd love it if you considered supporting the show. It's what keeps us ad-free and focused on the numbers that matter. Luna: Yeah, listener support really does make a difference. If you've gotten value from episodes like this, you can find us at buy me a coffee dot com slash fexingo. Lucas: Now, back to that mid-cap rotation. One of the reasons mid-caps are appealing right now is that they often have lower debt levels than large caps, so they're less exposed to rising interest expenses. And they're more nimble — they can pass on price increases faster than mega-caps that have to negotiate with big retailers. Luna: But not all mid-caps are created equal. You'd want to avoid the ones that are highly leveraged or operate in cyclical industries like basic materials. The sweet spot is mid-cap consumer staples or healthcare — companies that have a bit more room to grow but still have defensive earnings. Lucas: Right. And we're seeing that reflected in the performance of the Schwab U.S. Dividend Equity ETF, ticker s c h d, which has a strong mid-cap tilt. It's trading around 32 dollars and has held up better than the broader market during the recent yield backup. Its top holdings include names like Texas Instruments and Coca-Cola — again, pricing power. Luna: So the playbook for a hawkish Fed is essentially: look for low payout ratios, high dividend growth consistency, and pricing power. Avoid the highest yields unless you've checked the payout ratio and the debt profile. And consider mid-cap dividend ETFs as a way to get a yield boost without taking on small-cap volatility. Lucas: One more thing — keep an eye on the 2-year Treasury yield, which has risen to 4.20 percent as of this week. That's the rate most sensitive to Fed policy. If it keeps climbing, the short end of the curve becomes more competitive with dividend yields, and that could pressure stocks that are heavily owned by income-focused investors. Luna: But the dividend growth story still works if you're investing for total return over years, not months. A 3 percent yield that grows at 6 percent per year will eventually outpace a 5 percent bond that doesn't grow at all. Lucas: That's the long-term math that keeps dividend investing relevant even when the Fed is hawkish. Companies like Coca-Cola and Johnson & Johnson have proven they can compound through multiple rate cycles. The question is whether you have the patience to hold them when bonds are flashing a tempting headline number. Luna: And that's maybe the most important thing to remember: the yield you see today isn't the yield you'll earn over time. Dividend growth is the real engine. Lucas: Alright, that's our framework for navigating a hawkish Fed with dividend stocks. Next episode, we'll look at a specific sector that's actually benefiting from higher rates — and it might surprise you.