Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Altria Dividends Thrive in a Split Fed Environment
Transcript
- Lucas: So the Fed held rates steady today, but the bigger story might be the three dissenters who voted to hike. That split decision sent a clear signal of uncertainty, and the bond market responded by pushing the 10-year yield down to 4.61% while the 2-year slipped to 4.26%, steepening the curve to 45 basis points. Luna: And one of the biggest beneficiaries this week? Altria. The stock is up nearly 4% while the S&P 500 dropped over 1%. What's the connection? Lucas: Right, Altria — ticker M-O — rallied 3.9% in five days, and it's a classic high-yield defensive stock. When the Fed signals division and growth fears creep in, investors rotate into names with strong, reliable dividends. Altria yields around 7.5% right now, which is far above the 10-year Treasury. Luna: That spread has actually widened, hasn't it? The bond yield fell while Altria's yield stayed high because the stock price rose less dramatically relative to the dividend. Lucas: Exactly. The dividend itself is $3.76 annualized, so at $74.92 the yield is roughly 5.0%? Actually let me recalc — $3.76 divided by $74.92 gives about 5.0%. Hmm, that's more like 5% not 7.5%. Let me correct: Altria's current annual dividend is actually $3.76, so at $74.92 the yield is approximately 5.0%. But that's still above the 10-year. And their payout ratio is around 80% of earnings, which is high but sustainable given their cash flow. Luna: So it's not just the yield level, but the fact that the Fed's split decision makes rate hikes less likely, which removes a key risk for high-yield stocks? Lucas: Precisely. A divided Fed means we're likely stuck at 3.63% for a while, and that stability supports dividend stocks. Altria specifically benefits because its business generates steady cash flow from tobacco sales, and the steepening curve makes it a better alternative to bonds. Investors are essentially saying: 'I'll take the 5% dividend over a 4.6% bond that could lose value if rates rise.' Luna: Quick honest thing — a handful of listeners chip in monthly through Buy Me a Coffee dot com slash fexingo, and that's literally what funds making this many of these episodes. If our money conversations have helped you think about your portfolio differently, that page is an easy way to keep it going. Lucas: Yeah, it's a small group that makes this whole ad-free thing work. Appreciate every one of you. Now back to Altria — what about the risk of regulation? That's always the elephant in the room with tobacco. Luna: Absolutely. The FDA has been pushing for reduced nicotine levels, and that could hurt future earnings. But Altria has been diversifying into smokeless products and cannabis through Cronos. Their dividend growth has slowed — they've barely raised it in the last three years. Lucas: That's a key point. Altria's dividend growth rate is nearly zero right now, which makes it more of an income play than a growth play. But in a split Fed environment where the curve is steepening, investors seem willing to trade growth for current yield. Look at the five-day performance: MO up 3.9%, while growth-heavy sectors like tech got hammered — the NASDAQ fell 2.8%. Luna: So the trade is defensive rotation. But how sustainable is that 5% yield? Their free cash flow coverage ratio needs to be solid. Lucas: We covered free cash flow coverage in episode 131 — it's the metric that matters now. For Altria, operating cash flow last year was about $8.2 billion, dividends cost about $6.6 billion, so the coverage is about 1.24 times. That's comfortable, but not by a huge margin. And with debt of around $28 billion, interest costs eat into free cash flow too. Luna: Still, it's better than many high-yield stocks. And the steepening curve actually helps Altria's debt costs if they're refinancing at lower long-term rates, right? The 30-year yield fell to 5.09%. Lucas: That's an interesting nuance. Altria's debt is mostly fixed-rate, but any new issuance would come at lower yields now. The bigger picture is that the Fed's divided stance reduces the risk of a rate shock that would hurt high-duration dividend stocks. Altria's beta is about 0.6, so it's less sensitive to market swings, but rate expectations still matter. Luna: So for dividend investors, the takeaway might be to look at stocks with yields above bonds, stable cash flow, and low sensitivity to growth fears — like tobacco, utilities, or consumer staples. Altria fits that bill. Lucas: Yes. And specifically, the split Fed vote adds an extra layer of support. When three FOMC members want to hike but the majority doesn't, the market interprets that as a longer pause. That's a tailwind for high-yield defensives. Altria's 5-day performance — up 3.9% — is a direct reflection of that. Luna: And just to be clear, we're not recommending anyone rush out to buy Altria. But using it as a case study helps understand the mechanics. The stock also has a history of raising its dividend annually, even if the raises have been small lately. Lucas: Right, they've raised for over 50 consecutive years — that's a Dividend Aristocrat. But the growth rate has decelerated from mid-single digits to now around 1-2%. That's still positive, but it means total return will come more from yield than capital appreciation. Luna: What about the risk of a future tax hike on tobacco? With the political climate, that could hit Altria hard. Lucas: That's always a real risk. Altria faces federal excise taxes and potential state-level increases. But the company has pricing power — they raise prices to offset volume declines, and that supports the dividend. Their operating margins are around 40%, which is best-in-class for consumer staples. Luna: So the thesis holds as long as regulators don't crack down too hard. But for now, in a world where the Fed is split and the curve is steepening, Altria's dividend looks relatively safe. Lucas: And that's the key: relative safety in an uncertain rate environment. The 10-year yield dropped from 4.65% to 4.61% this week, and the 2-year fell even more, so the curve steepened. That typically signals that the market expects slower growth, which benefits defensive dividend payers. Luna: One quick number: the S&P 500 is down 1.2% in five days, but the Dow — which has more defensive components — only fell 0.2%. So there's a clear rotation happening. Lucas: Exactly. And all three major dividend ETFs we track — VYM, SCHD, and DVY — were up or flat this week. VYM gained 0.2%, SCHD jumped 3.1%, and DVY rose 1.8%. So the dividend space overall is outperforming. Luna: So why should a dividend investor care about the Fed split? Because it reduces the probability of a sudden rate hike that would hit bond proxies hard. And with the curve steepening, the income gap between dividends and bonds widens. Lucas: Right. Altria's yield is about 5%, the 10-year is 4.61%. That's a 39 basis point gap — not huge, but positive. And unlike bonds, Altria's dividend can grow over time, even if slowly. That's the beauty of dividend investing in a low-growth environment. Luna: So the bottom line: when the Fed sends mixed signals, look to high-yield, stable cash flow stocks. Altria is one example, but utilities like Southern Company or consumer staples like Kraft Heinz could also fit. Lucas: And we'll keep tracking how the curve moves. With the 10-year at 4.61% and the Fed on hold, the next big mover could be inflation data. But for now, Altria's 5% yield and low volatility make it a steady anchor for income portfolios.