Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Dividend Growth Beats Yield in a Falling Rate June 2026
Transcript
- Lucas: So let's talk about something that's been bugging me this week. Everyone's fixated on yield — the highest number you can grab — but I think the market is quietly signaling that dividend growth matters a lot more right now. Luna: Because yields on Treasuries are sliding a bit? The 10-year dropped to 4.46 percent from 4.49 last week. Lucas: Exactly. And a lot of income investors are still reaching for the 5 percent plus yields — think Realty Income, down 2.5 percent in five days, or Verizon, off 3.6 percent. But the real story is that the yield curve has flattened further, the 10-year minus 2-year spread is down to 27 basis points. That's a classic signal that growth expectations are softening. Luna: So you're saying that in a lower-growth environment, companies that can actually increase their dividends become more valuable. Lucas: Precisely. Let's look at the numbers. Coca-Cola currently yields about 3.1 percent, but they've been hiking their dividend at roughly 5 percent a year. Johnson & Johnson yields 3.0 percent with a 6 percent growth rate. Compare that to something like Verizon, yielding 5.4 percent, but their payout growth has been flat — they've barely raised the dividend in three years. Luna: Right, Verizon's free cash flow is under pressure from network upgrades. So your income from Verizon stays the same, while inflation eats away at it. Lucas: That's the key. Inflation may be moderating, but it's still above 2 percent. If you own a stock that's not growing its dividend, your real income is declining. The rule of 72 tells us that a 6 percent growth rate doubles your dividend every 12 years. A flat yield never doubles. Luna: And the market seems to be pricing that in. Look at the Schwab U.S. Dividend Equity ETF, ticker s c h d, down 2.3 percent in five days — worse than the S&P 500's 1.1 percent drop. But that's because SCHD has more exposure to high-yield sectors like utilities and REITs, which are getting hammered. Lucas: Right, the Vanguard High Dividend Yield ETF, V-Y-M, down just 0.7 percent. VYM holds more dividend growers like Coke and J&J. So the market is actually rewarding the growth component. Luna: Interesting. So the conventional wisdom that you should just buy the highest yield is losing ground. Lucas: I think it's always been a bit of a trap, but especially now. The Fed held rates steady at 3.63 percent — the effective fed funds rate as of June 19. When rates are stable, companies with pricing power and strong cash flows can keep hiking dividends. But the high-yield names that borrowed heavily in a low-rate environment are now struggling. Luna: Realty Income is a classic example. It's a triple-net lease REIT — their tenants are mostly investment-grade, but their cost of capital has gone up. The dividend yield is around 5.6 percent now, but the stock is down 2.5 percent in five days. The market is questioning whether they can grow the payout. Lucas: And they've been cutting their guidance. So the dividend might be safe, but the growth trajectory is flattening. Meanwhile, Procter & Gamble, yield about 2.4 percent, but they've raised their dividend for 68 consecutive years. That kind of track record commands a premium. Luna: So for someone building a portfolio today, what's the right approach? Do you avoid high yield entirely? Lucas: Not entirely. But I'd tilt toward the 'dividend aristocrats' — companies with at least 25 years of consecutive dividend increases. They tend to have lower payout ratios, stronger balance sheets, and more predictable growth. Luna: You know, this conversation reminds me that we keep this podcast ad-free and listener-supported. If today's discussion was worth a coffee to you, you can buy us one at buy me a coffee dot com slash fexingo. It genuinely helps us keep doing this. Lucas: Yeah, and we appreciate that. Okay, so back to the investing side — let's talk about how you actually screen for dividend growth. Luna: Right. What metrics should people look at? Lucas: First, the payout ratio. If a company is paying out more than 60 percent of its earnings as dividends, there's less room for growth. Second, the dividend growth rate over the last five and ten years — look for at least 5 percent annualized. Third, free cash flow coverage. If free cash flow per share is growing faster than the dividend, you have a buffer. Luna: And you'd apply that across sectors? Because tech companies rarely pay high dividends, but some like Microsoft and Apple have been growing theirs nicely. Lucas: Exactly. Microsoft yields less than 1 percent, but they've been hiking at 10 percent a year. That's a growth story, not an income story. But if you're retired and need current income, you might want a blend. The point is, don't just sort by yield. Luna: So let's bring it back to the current market. With the yield curve flattening, what sectors are you favoring for dividend growth? Lucas: Healthcare and consumer staples stand out. Companies like Johnson & Johnson, PepsiCo, and Coca-Cola have pricing power and global demand. They can pass on higher costs. Also, some industrials like Caterpillar — they've been raising dividends as their earnings benefit from infrastructure spending. Luna: And you'd avoid the rate-sensitive sectors like utilities and REITs? Lucas: For now, yes. But not forever. If the Fed eventually cuts rates — which isn't expected until late 2027 or 2028 — those sectors could rally. But the key is to own stocks that can grow their dividends through the cycle, not just when rates are low. Luna: One more thing — how do you think about dividend ETFs versus individual stocks for this strategy? Lucas: ETFs give you diversification, but you lose control over the growth profile. For example, the iShares Select Dividend ETF, D-V-Y, yields about 3.5 percent but has a higher exposure to utilities. If you want to emphasize growth, consider the ProShares S&P Dividend Aristocrats ETF, n o b l, or just build a portfolio of 10 to 15 individual aristocrats. Luna: That requires more research, but the payoff can be a rising income stream that outpaces inflation. Lucas: Exactly. And that's what we're really after — not just a high yield today, but a yield that grows over time. In a world where the 10-year Treasury yields 4.46 percent and that number is falling, locking in a growing dividend stream is a powerful hedge. Luna: Alright, so to sum up: focus on dividend growth, not just yield. Look for payout ratios under 60 percent, a history of hikes, and strong free cash flow. And consider aristocrats over the highest yielders. Lucas: That's the takeaway. And if you're curious about specific stocks that fit this bill, we can dive into that in a future episode. Luna: Sounds good. Thanks, Lucas. Lucas: Thanks, Luna.