Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Stocks Hold Up When Rates Rise Again
Transcript
- Lucas: So the 10-year Treasury yield ticked back up to 4.49 percent this week, and you can see it rippling through dividend stocks in a pretty uneven way. Luna: Yeah, Verizon dropped nearly 6 percent in five days. Johnson & Johnson down 5.2 percent. Realty Income off 4 percent. Lucas: Right. But Procter & Gamble was actually up half a percent. So the question is: what's different this time? The Fed's held rates steady, but the tone has shifted under Kevin Warsh. Luna: What do you mean by 'tone'? Because the effective Fed funds rate is still 3.63 — basically flat. Lucas: Exactly. The policy rate hasn't moved, but the narrative has. Warsh gave that speech last week — one headline called it 'regime change but in a velvet glove.' The market is repricing the path forward, not the current rate. Luna: So it's the expectation of higher for longer that's hurting dividend stocks? Because they compete with bonds for income. Lucas: That's part of it. But look at the yield curve — the spread between the 10-year and the 2-year is now just 27 basis points, down from 29. It's still positive, but flattening. That's weird for a rising rate environment. Luna: Yeah, usually when long rates go up, the curve steepens. What's flattening it here? Lucas: The 2-year yield rose faster — from 4.05 to 4.20 percent. That's the market pricing in a more hawkish Fed in the near term. So dividend stocks are getting squeezed from both sides: long-term yields make them less attractive, and short-term rate expectations raise the risk of a slowdown. Luna: And that explains why utilities and REITs got hammered, but something like Procter & Gamble held up? Lucas: Exactly. P&G has pricing power and a dividend growth streak. It's not just a bond proxy — it's a quality compounder. The market is rewarding that distinction. Luna: But Verizon's yield is over 5 percent now. Why wouldn't that be attractive to income seekers? Lucas: It's attractive on a yield basis, but the market is worried about the sustainability. Verizon's debt load and the need for capex in 5G — when rates are higher, that debt service costs more. So a high yield can signal distress, not opportunity. Luna: Right, so the dividend safety score matters more now than the raw yield. That's a shift from even a year ago. Lucas: Speaking of shifts — have you noticed the mid-cap rotation in dividend ETFs? SCHD is down almost 3 percent this week, but its mid-cap tilt means it's holding up better than some large-cap value funds. Luna: Yeah, SCHD focuses on quality metrics — return on equity, dividend growth — and it's got a lot of mid-caps. That's been a theme we've talked about before. Lucas: And VYM, which is more large-cap oriented, was only down 0.7 percent. So it's not a uniform sell-off. The dispersion is telling. Luna: Let's talk about covered calls as a strategy. Because if dividend stocks are getting choppy, writing calls against them can juice the yield. Lucas: Sure, but you cap the upside. In a market that's grinding higher — the S&P 500 is up 0.9 percent this week — you could miss out. The Nasdaq is up 2.4 percent. Luna: True, but for income-focused investors who are okay with giving up some upside for a higher current yield, it's a trade-off. Especially if they think rates staying higher will cap equity gains. Lucas: And the VIX has been relatively low, so option premiums aren't huge. But if volatility picks up — say, from the Iran peace talks or a surprise from Warsh — covered calls could become more attractive. Luna: Speaking of surprises, what's your take on the SpaceX IPO fallout? It dropped after a hot first day, and some retail buyers are underwater. Lucas: That's a speculative story, not a dividend story. But it does remind me that when rates are rising, investors flock to cash flow generating assets. Dividends are that — but only if the cash flow is real. Luna: You know, talking about what's real — if this conversation helped you think about your portfolio differently, honestly, if today was worth a coffee to you, there's a link. Buy me a coffee dot com slash fexingo. Lucas: That's exactly right. It keeps the show ad-free and independent. No pressure, but it makes a difference. Luna: So back to the data — one thing I noticed is that Realty Income, ticker O, dropped 4 percent. That's a triple-net lease REIT with a strong track record. What gives? Lucas: Realty Income is sensitive to rates because its tenants sign long-term leases, so the cash flows are bond-like. When the 10-year jumps 6 basis points in a week, the present value of those future rents falls. Plus, the dividend yield now is around 5.7 percent, but if rates keep climbing, that yield needs to rise to compete. Luna: So you'd need the price to drop further to push the yield up. That's the classic bond proxy dynamic. Lucas: Exactly. And that's why I'm watching the 30-year Treasury yield — it's at 4.93, flat this week. If it breaks above 5 percent, REITs and utilities could face another leg down. Luna: But what about international dividend stocks? We've talked about them before. Are they a hedge here? Lucas: They can be, if the dollar weakens. The dollar has been strong, which hurts the local currency returns for U.S. investors. But some European and Asian dividend payers have higher yields and better valuation. Luna: Right, the ECB is in a different cycle. Their rates are lower, so dividend stocks there don't face the same competition from bonds. Lucas: That's a good point. So for a U.S. investor, diversifying into international dividend ETFs could be a way to get yield without the same rate sensitivity. Luna: But you'd take on currency risk. The dollar has been strong, so if it weakens, that's a tailwind. But if it strengthens further, you lose on the currency conversion. Lucas: Right. So it's a hedge, not a sure thing. And that's the theme this week: nothing is a sure thing when the yield curve is flattening and the Fed is in transition. Luna: One last thing — Altria, ticker MO, down 2.5 percent. That's a high-yield stock at over 8 percent, but it's got secular decline risk. Is it a value trap? Lucas: Altria has been a dividend powerhouse, but the volume declines in cigarettes are real. The dividend is well-covered by earnings, but if the business shrinks faster than expected, that coverage erodes. It's a high-risk, high-yield play. Luna: So for income investors right now, the playbook is: favor quality, watch the curve, and don't chase yield without understanding the business. Lucas: Exactly. And keep an eye on Warsh's next speech. If he signals a faster pace of rate hikes, dividend stocks could be in for more pain. If he sounds dovish, the opposite. Luna: All right, let's see what next week brings. Thanks for listening.