Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Coca-Cola Dividends Compound Through the 10-2 Yield Spread
Transcript
- Lucas: If you look at the yield curve this morning, the ten-year Treasury is at 4.54 percent, the two-year at 4.16. That spread of 35 basis points is the narrowest we have seen in weeks. And I think it actually tells us something useful about dividend stocks right now. Luna: How so? I mean, conventional wisdom is that when bonds yield more, dividends lose their appeal. Lucas: Right, but that is only true if you are comparing current yield to current yield. If you are a long-term cash flow investor, the real comparison is between a bond coupon that stays fixed for the life of the bond and a dividend that grows over time. And that is where a stock like Coca-Cola becomes a really interesting case study. Luna: Coca-Cola yields about 2.3 percent right now. That is well below a ten-year note. So how does that math work? Lucas: It works because of the dividend growth. Coca-Cola has raised its dividend for 63 consecutive years. Over the past decade, the compound annual growth rate of its dividend has been around 5 percent. So if you bought the stock today and held for ten years, your yield on cost — what you earn relative to your purchase price — would be significantly higher than 4.54 percent by year ten, assuming they keep raising at that pace. Luna: So you are saying the bond looks good today, but the dividend stock looks better over time. Lucas: Exactly. And the flattening yield curve actually reinforces the case. When the ten-year yield drops relative to the two-year, it usually signals that the market expects slower growth or lower inflation ahead. In that environment, companies with pricing power and stable demand — like Coca-Cola — tend to hold up well. Their dividends become a source of predictable income that bonds cannot match over a full cycle. Luna: But is 2.3 percent enough to compensate for the risk? Because stocks are more volatile than bonds. Lucas: Fair question. The volatility is real. Coca-Cola is down about 0.6 percent over the past five days as of this morning, while bonds have been relatively flat. But the total return picture changes when you factor in dividend reinvestment. If you reinvest those quarterly payouts, you accumulate more shares over time. Historically, that compounding effect has accounted for more than 40 percent of the S&P 500's total return over the long run. Luna: And with the Fed funds rate holding at 3.63 percent, cash is not a great alternative either. Lucas: No, it is not. Money market funds are yielding around 3.5 percent right now, but that rate will drop if the Fed eventually cuts. A dividend growth stock locks in a rising stream of income, whereas a bond or cash instrument gives you a fixed nominal return. That is the core argument for dividend growth in this environment. Luna: Let's talk about the math in more detail. If Coca-Cola's dividend grows at 5 percent annually, how long until its yield on cost exceeds the ten-year bond? Lucas: Roughly eight years, assuming the bond yield stays around 4.5 percent and the stock price stays flat. That is a pretty conservative assumption. If the stock price rises over time, the current yield stays low, but the total return improves. Luna: So the key is patience and a long time horizon. Lucas: Exactly. And that is why dividend growth investing is not about chasing the highest yield today. It is about building a portfolio of companies that can raise their payouts consistently, regardless of what the bond market is doing on any given day. Luna: I want to bring in a real-world example. Coca-Cola's dividend per share in 2016 was $1.40. By 2026, it is around $1.96. That is a 40 percent increase over a decade. A bondholder would have gotten the same coupon for ten years. Lucas: And that difference compounds. If you reinvested those growing dividends, your total return would be meaningfully higher than the bond's return, even if the stock price did not move much. That is the power of dividend growth. Luna: So for an investor focused on cash flow, what is the takeaway today? Lucas: Do not look at the current yield in isolation. Look at the dividend growth rate, the payout ratio, and the company's competitive moat. Coca-Cola's payout ratio is about 75 percent, which is sustainable given its stable cash flows. The moat is the brand and global distribution network. Those are the factors that matter. Luna: And what about the yield curve narrowing? Does that change the calculus? Lucas: It reinforces it. A flattening curve often precedes economic uncertainty. In uncertain times, investors pay a premium for reliable income. Companies that have raised dividends for decades become more valuable. That is why Coca-Cola's stock has held up better than some high-growth names recently. Luna: Speaking of holding up, the broader market — the S&P 500 is at 7,575, up about half a percent over the past five days. The Dow is down about 0.8 percent. So there is some rotation going on. Lucas: Yes, and dividend stocks are often part of that rotation when growth concerns emerge. Investors move from high-beta names to stable compounders. That is exactly the environment where Coca-Cola and similar stocks shine. Luna: You know, we talk a lot about building portfolios for long-term income. And I think if these conversations have helped you think about your own cash flow strategy differently, that is exactly why we keep doing this show ad-free. Lucas: Yeah, we really appreciate that. And if today's episode was worth a coffee to you, you can find us at buy me a coffee dot com slash fexingo. No pressure, just if it added value. Luna: Absolutely. And honestly, even just sharing the show with a friend who is trying to figure out dividend investing — that helps too. Lucas: All right, back to the yield curve. One more point I want to make about the reinvestment timing. Luna: Go ahead. Lucas: When the yield curve is flat, short-term bonds offer almost as much yield as long-term bonds. So an income investor might be tempted to stay short and wait for rates to rise. But that strategy misses the dividend growth opportunity. By staying short, you sacrifice the compounding that comes from owning a growing dividend stream. Luna: So you would rather own Coca-Cola than a two-year note yielding 4.16 percent? Lucas: For a long-term cash flow portfolio, yes. The two-year note will mature in two years, and you will have to reinvest at whatever rate is available then. The dividend stock will keep paying and raising its payout for as long as you hold it. That certainty of growth is valuable. Luna: Especially in an environment where the Fed is on hold. If the funds rate stays at 3.63 percent through the end of the year, short-term yields could drift lower. Lucas: Exactly. And the market is already pricing in a potential rate cut next year. If that happens, the two-year yield will fall, and reinvestment risk becomes very real for bond investors. Luna: So the bottom line: dividend growth stocks like Coca-Cola are not just about income. They are about hedging against reinvestment risk. Lucas: That is a great way to put it. And it is why we keep coming back to this topic. The yield curve changes, but the principles of compounding and growth endure. Luna: Alright, next episode we are going to look at a different angle — maybe something on international dividend stocks, given the headlines about Chinese AI models and global shifts. Lucas: That sounds like a great plan. For now, keep your dividends growing and your cash flow compounding.