Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Stocks Beat Bonds in a Steepening Curve
Transcript
- Lucas: So the ten-year Treasury is sitting at four point seven two percent this week, and the thirty-year just poked above five point three. That's a big deal for anyone who owns dividend stocks, because the classic argument is: why take equity risk for a three or four percent yield when the government will hand you five? Luna: And yet, look at the tape this week. Johnson and Johnson is up nearly four percent, Coca-Cola up two and a half, Verizon up over three. The S&P is down. So the market seems to be saying something different. Lucas: Exactly. And that's the angle I want to dig into today. A steepening curve — where long rates rise faster than short rates — is usually framed as a threat to dividend payers. But the actual data this week suggests the opposite for the right kind of companies. Luna: So what makes a company the 'right kind' when bond yields are climbing? Lucas: Let's start with a distinction that matters: not all dividend stocks are created equal. The high-yield, low-growth names — the ones that trade like bond proxies — are the ones that typically get crushed when the ten-year moves up. But the dividend growers, the companies with real pricing power and clean balance sheets, they can actually hold up fine, or even rally. Luna: Because their cash flow grows, so the yield isn't static. Lucas: Right. If you buy a stock at a four percent yield and the dividend grows five percent a year, your yield on cost climbs every year. A bond pays the same coupon forever. So when long rates rise, the bond's fixed payment looks less attractive relative to a growing stream. Luna: But how do you know which one you're getting? I mean, a high yield can be a trap, as we've talked about before. Lucas: It can. But let's use a concrete example from this week. Johnson and Johnson is up three point nine percent in five days. The stock yields around three percent. That's not a huge yield. But J and J has a AAA balance sheet, one of only two companies in the world with that rating, and it's raised its dividend for over sixty years. Luna: So the market is paying up for the reliability, not just the coupon. Lucas: Precisely. And compare that to a name that's more bond-like — a utility or a REIT, say, where the cash flow is more fixed. Those tend to behave more like long-duration bonds, so they get hit harder when yields rise. Realty Income, for example, is down a bit this week, and we've seen that pattern before. Luna: So the steepening curve is almost like a stress test for the quality of the dividend. Lucas: That's a great way to put it. And the ETFs are showing the split. VYM, the high-dividend yield fund, is down zero point seven percent this week. SCHD, which focuses on quality dividend growers, is up zero point seven. DVY, which leans more value, is up one point two. So even within the dividend space, there's a clear rotation happening. Luna: And that's happening while the broad market is down. So it's not about dividend stocks versus growth, it's about which dividend stocks. Lucas: Right. And that's where I think most investors get it wrong. They see 'dividend stock' and think it's one monolithic category. But the fundamental question is: can the company grow its cash flow faster than the market demands a risk premium? Luna: And how does the steepening curve change that math? Because I keep hearing that higher rates are bad for all equities. Lucas: Higher rates do raise the discount rate for future cash flows, which hurts growth stocks more because more of their value is in the distant future. But for mature dividend payers, a lot of the return comes from current yield and near-term growth. So the impact is smaller. And if the steepening curve is actually a sign of stronger growth ahead, that can boost earnings for consumer staples and healthcare names. Luna: So the market might be looking at J and J and seeing that the dividend growth is more certain than a bond coupon that's fixed for ten years. Lucas: Exactly. But there's a nuance. A steepening curve can also happen because the Fed is cutting short rates while inflation expectations rise. That's a different environment than one where growth is solid. So you have to look at the reason behind the move. Luna: And right now the Fed funds rate is flat at three point six three, while the ten-year is up. So the market is pricing in either more inflation or more term premium. Lucas: Right. And that's why you want companies with pricing power — the ones that can pass on higher costs. Coca-Cola is a classic example. They raised prices through the inflationary period, and the dividend keeps growing. That's why the stock is up two and a half percent this week. Luna: So how do we translate this into a practical checklist for our listeners who want to pick dividend stocks in this environment? Lucas: First, look at the dividend growth rate relative to the ten-year Treasury yield. If the dividend is growing at six percent and the ten-year is at four point seven, the stock has a real advantage. Second, check the payout ratio — you want room to keep raising the dividend. Third, look at the balance sheet. A company with a lot of debt is more vulnerable when rates rise. Luna: And what about the yield itself? Should you demand a higher yield now that bonds pay more? Lucas: That's the trap. If you only chase yield, you end up with the bond proxies that are most at risk. Instead, think of the total return: yield plus dividend growth. A three percent yield with seven percent growth beats a five percent yield with no growth in just a few years. Luna: That's a useful way to frame it. So the takeaway is: don't abandon dividend stocks just because bonds yield more, but be more selective. Lucas: Exactly. And the data this week shows that the market is rewarding exactly that selectivity. J and J, KO, VZ — all up. Meanwhile the broader indices are down. That's not a coincidence. Luna: It's almost like the market is telling us that in a steepening curve, quality dividend growers are the new bond alternative. Lucas: And honestly, if today's conversation helped you think about that trade-off in a new way, that's the kind of value we love to hear about. If it was worth a coffee to you, you can support the show at buy me a coffee dot com slash fexingo. It keeps these conversations ad-free and independent. Luna: Yeah, every little bit genuinely helps us keep digging into topics like this. Lucas: So back to the practical side. One more thing to watch: the shape of the curve itself. Right now the spread between the ten-year and the two-year is about fifty basis points, up from near zero a year ago. That's a signal that the market expects growth to pick up, which historically has been a decent environment for dividend growers. Luna: But what if the curve keeps steepening? Should you adjust your portfolio? Lucas: You don't need to make drastic moves. Just tilt a little more toward quality: companies with low debt, high return on invested capital, and a track record of raising dividends through different rate environments. And don't forget to check the sector. Healthcare and consumer staples have historically done well in rising rate periods because they have pricing power. Luna: So, in one sentence, what's the smartest move for a dividend investor right now? Lucas: Look past the yield and focus on the growth of the dividend — because in a steepening curve, the market pays a premium for cash flow that can actually expand.