Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Defensive Dividend Stocks Are Surging as Tech Sells Off
Transcript
- Lucas: If you looked at your portfolio this morning and saw Coca-Cola up nearly ten percent in a week while the Nasdaq dropped almost three percent, you might wonder what's going on. Luna: I did see that. KO at eighty-nine dollars, that's a big move for a company that usually inches up a percent here and there. Lucas: Exactly. And it's not just Coke. Verizon jumped seven point eight percent in the same period. Altria up nearly four. Meanwhile the S&P 500 is down one point two percent and the tech-heavy Nasdaq is down two point eight. Luna: So we're seeing a classic rotation out of growth into defensive dividend stocks? Lucas: That's exactly what's happening. And the catalyst isn't hard to find. The Fed held rates flat again at three point six three percent, and the two-year Treasury yield actually dropped a bit to four point two six. That makes the yield curve steeper—the spread between the ten-year and two-year went from thirty-five to forty-five basis points in just a few days. Luna: Right. A steeper curve usually means the market expects either growth or inflation. But in this case, it seems more about a flight to safety. Lucas: Exactly. The headlines aren't helping: China threatening retaliation over a U.S. humanoid robot ban, the Dow dropping a thousand points earlier this week. When uncertainty spikes, money flows to steady cash flows. Luna: And Coca-Cola and Verizon are about as steady as it gets. But is this move sustainable? I mean, Coke's dividend yield is only about three percent now after this run-up. Lucas: That's the big question. The yield on Coke is lower, but the dividend growth history is solid. What matters more now is free cash flow coverage. Coca-Cola's free cash flow covers its dividend by more than one point five times. Verizon, even with its debt, covers it by about one point three times. Luna: So the safety is in the cash flow, not just the yield. And SCHD, the Schwab dividend ETF, is up three point one percent, which is better than the broader market but less than the single stocks. Lucas: Right. SCHD is diversified, so it captures some of the ups and downs. But in a rotation like this, the concentrated names move harder. Investors are picking the most reliable dividend payers, not just any dividend stock. Luna: What about the Fed? They seem stuck at three point six three percent. If they stay flat, does that help dividend stocks? Lucas: It does in a relative sense. When rates are stable and not rising, dividend stocks become more attractive compared to bonds. The ten-year Treasury yields four point six one percent, so a three percent dividend from Coke might not sound great, but the dividend grows over time. Treasuries don't. Luna: And with the yield curve steepening, short-term bonds are yielding less, so money rotates into longer-duration assets like dividend stocks. Lucas: Exactly. The three-month Treasury dropped to three point nine percent, so that cash is getting less attractive. People are reaching for yield and safety at the same time. Luna: I want to push back a bit: is this rotation really about fundamentals, or is it just a knee-jerk reaction to the tech selloff? I mean, the Nasdaq is down two point eight percent, but it's still up a lot from a year ago. Lucas: That's fair. It's partly a flight to safety, but the magnitude suggests something deeper. Look at Verizon: it's been a laggard for years, and now it's up almost eight percent in a week. That's not just fear—it's a reassessment of value. Verizon's free cash flow yield is around nine percent, even after the rally. Luna: Nine percent free cash flow yield? That's huge. Lucas: It is. And the market is finally noticing that these telecom and consumer staple companies can generate cash even when the economy slows. That's why Johnson & Johnson is up two point four percent, Procter and Gamble flat but still holding up. Luna: So the thesis is that in a flat Fed, steepening curve environment, cash flow trumps growth. Lucas: Exactly. And the dividend Growth ETFs, the ones that focus on rising payouts, are the ones to watch. DVY, the iShares Select Dividend ETF, is up one point eight percent. That's solid relative to the S&P. Luna: But if the economy actually turns down, won't these companies cut dividends? I remember in 2020, some dividends were slashed. Lucas: A few, but not the aristocrats. The companies we're talking about—Coca-Cola, J&J, PG—they've maintained or grown dividends through multiple recessions. Their payout ratios are moderate. Coca-Cola's payout ratio is about seventy-five percent, which is manageable. Luna: So this is a quality move, not just a yield grab. Lucas: That's how I see it. And it's not just us saying it. The inflows into dividend ETFs have been strong this week. SCHD saw net inflows of over a billion dollars in the last five trading days. Luna: That's a lot. So if someone is thinking about adding dividend stocks now, should they chase these movers or wait for a pullback? Lucas: I'd say don't chase the hot performers. But if you're dollar-cost averaging into a diversified dividend ETF like SCHD or VYM, that's a fine strategy regardless of timing. VYM is only up zero point two percent this week, so it's barely moved. Luna: Right, VYM is the Vanguard High Dividend Yield ETF. It's more value-oriented and hasn't rallied as much. That might be a better entry point. Lucas: Yes. And now might be a good time to check your own portfolio's income durability. If you're relying on dividends from tech stocks that have been cutting buybacks, you might want to look at free cash flow coverage ratios. Luna: Speaking of things that rely on listener support—I know our show doesn't have ads, and that's a choice we love. But a couple of dollars a month is genuinely what keeps these going. Lucas: Yeah, if our money conversations have helped you think about a decision differently, buying us a coffee is a great way to keep it ad-free. You can do that at buy me a coffee dot com slash fexingo. Luna: Even a little helps us keep researching these angles. And we really appreciate everyone who's already chipped in. Lucas: So back to the rotation: do you think this is a multi-month trend or just a one-week panic trade? Luna: I lean toward multi-month, at least until the Fed gives a clearer signal. The yield curve is still steep, and with the China situation unresolved, investors will stay defensive. Lucas: I agree. But we should watch the VIX—if it spikes again, dividend stocks could get sold too. But for now, the setup favors cash flow. Luna: Alright, so key takeaway: check your free cash flow coverage, don't overpay for yield, and consider dollar-cost averaging into a broad dividend ETF. Lucas: Good summary. And keep an eye on next week's jobs report, because if it comes in hot, the Fed might start talking about rate hikes again, and that could change the game. Luna: True. But for this week, the dividend income story is the one that's working.