Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How REIT Dividend Yields Are Pricing the New Normal Yield
Transcript
- Lucas: The 30-year Treasury just closed at five point zero one percent on Friday. That is the first time the long bond has yielded over five percent since 2023. And for an income investor, that number changes the math on just about every dividend stock you own. Luna: Especially REITs. They get called 'bond proxies' all the time, but if the risk-free rate is now five percent, the proxy better offer a serious spread. Lucas: Exactly. So let’s look at the biggest net-lease REIT in the market: Realty Income, ticker O. It yields about five point nine percent today. That’s a spread of roughly ninety basis points over the 30-year. Historically, O has traded at a spread closer to one fifty or two hundred basis points above the long bond. Luna: So the spread is tight. And that’s before we even talk about payout ratio or interest costs. Lucas: Right. O’s payout ratio on adjusted funds from operations is about seventy-five percent. That’s healthy — they’ve raised the dividend for over one hundred consecutive quarters. But the stock is down about fourteen percent from its 2024 highs, and the yield has drifted up because the price fell, not because the dividend grew faster. Luna: And the broader REIT index — the Vanguard Real Estate ETF, VNQ — is off about six percent year-to-date. So the whole sector is repricing against this higher rate backdrop. Lucas: Let’s compare O to some other dividend names to see what spreads look like. Coca-Cola yields about two point eight percent. Johnson & Johnson yields about three point one. Procter & Gamble two point four. Those are classic defensive stocks, but their yields are well below the risk-free rate right now. Luna: Which means investors are accepting those yields for the perceived safety and dividend growth. But a REIT like O has to compete differently because its growth is tied to rent escalators — typically one to two percent annual bumps. Lucas: That’s the key tension. O’s dividend growth rate has averaged about four point five percent annually over the last decade. But if your yield is five point nine and your growth is four point five, your total return expectation is roughly ten to eleven percent before any multiple expansion. That’s not bad. But the long bond offers five percent with zero credit risk and zero volatility. Luna: So the question becomes: does that extra four to five percent potential return compensate you for the risk of a recession, a tenant default, or rising interest rates? For a dividend investor nearing retirement, maybe not. Lucas: And the interest rate risk is real. O has about eighteen billion dollars in debt, almost entirely fixed-rate, with a weighted average interest rate around three point nine percent. Maturities are laddered, but about two billion comes due in 2027. Refinancing that at current rates would add maybe sixty to seventy basis points to their interest cost. Luna: That’s manageable, but it does squeeze the margin. And if the Fed holds rates higher for longer — which the latest data suggests they might — then the pressure continues. Lucas: The jobs report last week was hot again, and the market is pricing in no cuts for the rest of 2026. So the ten-year yield sits at four point five five, up from four forty-seven a week ago. That’s a rapid move. Luna: And we saw some dividend ETFs get hit. VYM fell one point nine percent over five days. SCHD was basically flat, down only two-tenths. DVY slipped three-tenths. So the higher-yielding value-oriented funds held up better than the broad market, which dropped two point seven percent. Lucas: That’s consistent with the narrative that dividend stocks act as a deflation hedge during rate spikes. But for REITs specifically, the correlation with rates is more nuanced. Historically, when rates rise because growth is strong, REITs can still do okay because occupancy and rent growth improve. When rates rise because of inflation, REITs tend to suffer because their leases have long durations. Luna: And that’s where O’s tenant base matters. They have over fifteen hundred tenants, but their top tenant is Dollar General, which makes up about five percent of rent. Then Walgreens, Dollar Tree, and 7-Eleven. Those are relatively recession-resistant, but Walgreens has its own headwinds. Lucas: Walgreens is a real risk. They’ve been closing stores, and their credit rating was downgraded to junk in 2024. O has about six percent of rent from Walgreens. If Walgreens starts rejecting leases at renewal, O could face a meaningful vacancy hit. Luna: So the dividend is safe for now, but the growth trajectory is uncertain. Let’s talk about alternatives within REITs. Have you looked at any of the industrial REITs? They tend to have shorter lease durations and more inflation pass-through. Lucas: Prologis, ticker PLD, yields about two point eight percent. That’s lower than O, but their rent growth has been running at six to eight percent annually because of e-commerce demand. So the growth rate is higher. For a younger investor, that might be more attractive. For someone needing current income, O’s yield is better. Luna: And then there’s the question of whether to use a REIT ETF versus picking individual names. VNQ yields about three point eight percent and has a low expense ratio. But you get exposure to office and mall REITs, which are structurally challenged. Lucas: Right. The ETF diversifies away single-tenant risk, but it also dilutes the yield. For an income investor who wants a high single-stock yield, O might still make sense if you believe the dividend is sustainable. But you have to watch that payout ratio and the balance sheet. Luna: And you have to be comfortable with the fact that the stock might trade flat or down for a while if rates stay here. The dividend is the total return in that scenario. Lucas: Which brings us back to the fundamental question: does a five point nine percent yield with low growth beat a five percent risk-free yield? For some investors, the answer is yes — because they need the income now and believe O’s rent stream is nearly as safe as a bond. For others, the spread is not wide enough to compensate for the uncertainty. Luna: And that’s really the takeaway for mid-2026: the old rule of thumb that REITs should yield two hundred basis points over the ten-year no longer holds. Today, you have to do the math on each holding individually, with realistic assumptions about growth and risk. Lucas: If today’s conversation helped you think through that math, and if it was worth a coffee to you, you can find the show at buy me a coffee dot com slash fexingo. That’s a small way to keep these episodes free and focused on the numbers that matter. Luna: Yeah, listener support really does make a difference. And we appreciate everyone who’s contributed already. Lucas: Alright, so to wrap the dividend picture: O’s yield is attractive relative to history, but the spread over Treasuries is compressed. Watch the ten-year yield. If it keeps climbing toward four point seven or four point eight, O’s stock could drift lower. But if the economy slows and rates fall, O could rally hard as that spread reverts. Luna: So the play for an income investor is to decide which scenario you think is more likely — and size your position accordingly. Don’t just buy the yield without understanding the rate sensitivity. Lucas: That’s the bottom line. Next episode, we’ll look at how dividend growth stocks like Microsoft and Apple are handling the buyback versus dividend question in this rate environment. See you then.