Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Aristocrats Are Hiding Their Weakest Links
Transcript
- Lucas: So we talk a lot on this show about dividend aristocrats — companies that have raised their payouts for at least 25 consecutive years. But if you look at the past five trading days, two of the most iconic aristocrats are taking a real hit. Johnson & Johnson is down three and a half percent, and Procter & Gamble is down nearly three percent. Luna: And this is during a week when the S&P 500 is up a bit. So it's not a broad sell-off. What's going on? Lucas: Right, the S&P is up about 0.2 percent in five days. So this is stock-specific pressure. And I think it's worth asking: when a dividend aristocrat drops like this, does it signal a dividend problem, or is it something else entirely? Luna: My first instinct with J&J is the talc litigation. That story has been dragging on for years, but it keeps evolving. Lucas: Exactly. J&J's dividend is rock solid — they've increased it for 62 consecutive years. The payout ratio is around 45 percent, plenty of room. But the legal overhang is real. Last week there were reports that a new wave of lawsuits might not be settled as cleanly as the company hoped. So the stock drops 3.5 percent. That's not a dividend risk; that's a narrative risk. Luna: And Procter & Gamble? Down almost three percent. That one surprises me more. P&G is about as steady as they come. Lucas: P&G is interesting because it's more macro. The 10-year Treasury yield has crept up to 4.56 percent, the 30-year is above 5 percent. And P&G's dividend yield is about 2.4 percent. When bond yields are that high, some investors rotate out of defensive dividend stocks into fixed income. Especially if they think the Fed might hike again in July. Luna: So the weak link isn't the dividend itself — it's the relative yield. The stock becomes less attractive compared to a risk-free bond. Lucas: Exactly. And that's the hidden vulnerability inside any dividend aristocrat portfolio right now. Even the best companies — J&J, P&G, Coca-Cola — can see their stock price compress if the yield on bonds keeps climbing. The dividend is safe, but the total return gets squeezed. Luna: But then we have something like Verizon, which is actually up almost two percent this week. Verizon's yield is over 6 percent. So maybe the market is rewarding stocks with higher current income? Lucas: That's exactly what's happening. Verizon's yield is high enough to compete with bonds. But you have to ask: is that yield sustainable? Verizon's payout ratio is over 50 percent, but their debt load is heavy. So you're getting paid more, but you're taking on more risk. The aristocrats with moderate yields and rock-solid balance sheets are caught in the middle. Luna: Which brings us to Coca-Cola. KO is only up 0.2 percent this week — basically flat. But it hasn't dropped like J&J or P&G. Why? Lucas: Coca-Cola has a yield of about 3.1 percent. That's above P&G's 2.4 percent and J&J's 3 percent. And their payout ratio is around 75 percent, which sounds high, but their cash flow is incredibly stable. Plus, Coca-Cola has zero legal overhang. No big lawsuits, no regulatory drama. So when rates rise, KO doesn't get hit as hard because the yield is competitive and the story is clean. Luna: So the weak link in an aristocrat portfolio isn't always the company — it's the yield relative to bonds, and any company-specific baggage. Lucas: Exactly. And here's the concrete takeaway: if you own dividend aristocrats, you need to look at each one's yield gap versus the 10-year Treasury. If your stock yields less than 3 percent and the 10-year is at 4.56 percent, you should understand why you're holding it. Is it for dividend growth? Is it for low volatility? Or is it just inertia? Luna: That's a good framework. And on the flip side, if you're hunting for yield, don't just grab the highest number. Verizon's 6 percent might look great, but you have to live with the sector risk and the debt. Lucas: Right. Now, one more data point: the yield curve is steepening. The spread between the 10-year and the 2-year is 36 basis points, up from 35 a day ago. That's still an inverted curve technically, but it's flattening toward normal. In a normal curve environment, financials and cyclicals tend to outperform defensives. So dividend aristocrats could face headwinds for a while. Luna: Unless the Fed actually cuts rates later this year. But the headlines this morning suggest a July hike is possible. Fed Governor Waller said they shouldn't 'fight the last war' but didn't rule out more tightening. Lucas: Yeah, and the effective fed funds rate is at 3.63 percent. If they hike, that puts more upward pressure on short-term yields, which makes cash and money market funds even more attractive. That's a tough environment for any stock that isn't growing fast. Luna: So what's the play for a dividend investor who wants to stay in aristocrats but doesn't want to see their portfolio drop 3 percent in a week? Lucas: I think you need to favor aristocrats with a yield above 3 percent, a payout ratio below 60 percent, and no major litigation or regulatory overhang. Coca-Cola fits. So does Realty Income, the REIT we talked about a few episodes ago — it yields over 5 percent and has a 30-year track record. But REITs have their own rate sensitivity. Luna: And what about the dividend ETFs? VYM, SCHD, DVY — they've all been flat or slightly up this week. Lucas: They benefit from diversification. But they also hold stocks like J&J and P&G. So the weakness in those names is a drag. If you own an ETF, you're not avoiding the problem; you're averaging it out. That's fine, but you need to know what's inside. Luna: Alright, so let's land this. If I'm a dividend investor looking at my portfolio today, what's the one thing I should check? Lucas: Check the yield of each holding against the 10-year Treasury. If your stock yields less than 3.5 percent, ask yourself: am I getting enough dividend growth to justify the rate risk? And check for any company-specific stories that could cause a short-term drop. Because in this environment, the market is punishing the weakest links — even among aristocrats. Luna: That's a solid takeaway. And honestly, if conversations like this have helped you think about your portfolio differently, you might consider supporting the show. It keeps us ad-free and focused on the numbers that matter. Lucas: Yeah, if today's episode was worth a coffee to you, the link is buy me a coffee dot com slash fexingo. No pressure — just a way to keep this going for people who find it useful. Luna: Exactly. And back to the topic — one more thing on J&J. Their dividend increase last April was 5.7 percent. That's still solid. So even if the stock is down, the income stream is growing. Lucas: Right. And that's the real test of an aristocrat: can they keep raising through the noise? If J&J delivers another increase next April, today's 3.5 percent drop will be a footnote. But if the legal situation gets worse, that's a different story. Luna: So keep an eye on the news, but don't panic over a bad week. Lucas: Exactly. Thanks for listening, and we'll talk again tomorrow.