Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Altria Dividends Survive a Steepening Yield Curve
Transcript
- Lucas: So the yield curve is steepening again — the 10-year Treasury is at 4.58 percent, the 2-year at 4.18 percent, spread of 42 basis points, up from 40 just a day ago. That's a move worth paying attention to if you own high-yield dividend stocks. Luna: And few stocks scream 'high yield' louder than Altria right now. Over 8 percent dividend yield. But also a stock that's down 1.5 percent in the last five days. Lucas: Right. So the question is: does that yield hold up as the curve steepens? Because traditionally, a steeper curve means the economy is expected to grow and rates are expected to stay higher for longer. That puts pressure on bond-like stocks — utilities, REITs, and yes, tobacco. Luna: Bond-like because the dividend is the main total return story. Capital appreciation is modest at best. Lucas: Exactly. Altria has a beta around 0.6 — it's less volatile than the market, but it's still sensitive to interest rates because investors compare its dividend yield to the risk-free rate. When the 10-year was at 3 percent, 8 percent looked amazing. At 4.58 percent, the spread is narrower. Luna: And Altria's payout ratio — I think last quarter was over 80 percent of earnings. That leaves very little cushion if earnings dip. Lucas: Eighty-two percent, actually. And that's the core tension. Altria generates enormous cash flow, but cigarette volumes in the US decline about 4 to 5 percent per year. They've been leaning into smokeless products — on! nicotine pouches, which grew 50 percent last year — but that business is still small relative to Marlboro. Luna: So the dividend is being sustained by price increases and cost cuts, not volume growth. That works in a stable economy, but if the curve steepening signals higher inflation or higher rates for longer, the reinvestment risk becomes real. Lucas: Reinvestment risk — that's a great way to frame it. If you're a dividend investor, you're taking those cash payouts and reinvesting them. If rates are at 4.5 percent on the 10-year, you might think twice about buying more Altria at 8 percent when the stock is falling and the payout ratio is tight. Luna: And the bond alternative is actually paying you that yield without the equity risk. A 10-year Treasury at 4.58 percent is not nothing. Lucas: Right. So let's contrast Altria with Coca-Cola and Procter & Gamble. KO yields about 3.1 percent right now, PG around 2.8 percent. Lower yields, but their payout ratios are in the 60 to 70 percent range. They have global diversification, pricing power, and less regulatory overhang. Luna: And both are Dividend Aristocrats — decades of increases. Altria has raised its dividend for over 50 years, but that streak is getting more expensive to maintain. Lucas: It is. And the market is pricing that in. Altria's stock is down 1.5 percent in the last five days while the S&P 500 is up 0.4 percent. The curve steepening is hitting the highest-yielding names hardest because the opportunity cost of owning them rises. Luna: So what's the play for an income investor who already owns Altria? Do you hold, trim, or rotate? Lucas: I'd say it depends on your yield requirement. If you need 8 percent current income, there aren't many alternatives with that kind of cash yield. But if you're reinvesting dividends, the lower payout ratio names might give you better total return over the next 12 months. And the yield curve steepening might continue — the Fed is on hold at 3.63 percent, but the long end is adjusting. Luna: We should also mention that Altria has a lot of litigation overhang. The Florida Engle cases, the Canadian settlement. Those are real cash outflows. Lucas: They set aside over $2 billion for the Canadian settlement last year. That's money that could have gone to share buybacks or debt reduction. So the dividend is safe in the near term — management has said it's a priority — but the margin for error is slim. Luna: And if the economy slows, cigarette volumes could decline faster. That's the double whammy — lower earnings and a higher risk-free rate. Lucas: Which brings us back to the yield curve. A steepening curve is usually a good sign for the economy — it means the bond market expects growth. But for high-yield dividend stocks, it's a headwind because the alternative yield is rising. Altria sits right at that intersection. Luna: So the key takeaway: Altria's dividend is high, but it's not as safe as it looks in a steepening rate environment. Investors should watch the payout ratio and the 10-year yield more than the stock price. Lucas: And honestly, if this kind of breakdown helps you think about your portfolio differently, that's exactly why we do this show. We keep it ad-free and independent, and listener support is what makes that possible. If today's episode was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to keep these conversations going without any sponsor pressure. We really appreciate it. Lucas: Alright, back to the curve. The 30-year Treasury is at 5.08 percent, down a couple of basis points. That's the long end pulling back slightly, but the steepening is still intact. For dividend investors, the message is clear: know your yield's true risk. Luna: And maybe don't fall in love with a high yield just because it's high. Look under the hood. Lucas: Exactly. Next time we'll look at how Realty Income is handling this same environment — a triple-net lease REIT with a 5.5 percent yield and a very different risk profile. Luna: Looking forward to it.