Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Consumer Staples Dividend Stocks Win in a Steep Yield Curve
Transcript
- Lucas: So the ten-year Treasury yield is at 4.40 percent, the two-year is at 4.09 — that's a 31 basis point spread. The curve has been steepening all month, and that's a signal the bond market is pricing in either a weaker economy ahead or maybe a shift in Fed policy. But here's the thing for dividend investors: when the curve steepens, not all dividend stocks behave the same way. Luna: Right, because a steepening curve often means long-term rates are rising faster than short-term rates, which can hurt stocks with long-duration cash flows. But some sectors actually hold up better. Lucas: Exactly. And that's where consumer staples come in. Think about Procter & Gamble. It's a Dividend Aristocrat — 68 consecutive years of dividend increases. Its earnings are predictable, recession-resistant. When the curve steepens, investors often rotate into that kind of reliability. P&G yields about 2.4 percent right now, which isn't eye-popping, but the total return story is about compounding that growth. Luna: So the argument is that staples have lower 'duration' than, say, a utility or a real estate investment trust. Their cash flows are more front-loaded, less sensitive to distant discount rates. Lucas: That's exactly the framework. A stock's duration is a measure of how sensitive its price is to changes in interest rates. A utility with 30 years of regulated earnings has high duration — it gets hit hard when long-term rates rise. But P&G sells toothpaste and laundry detergent. People buy those every week regardless of the rate environment. So its cash flows are near-term and stable. That makes it less vulnerable to a steepening curve. Luna: And Coca-Cola is in the same boat. KO yields about 2.7 percent, 63 years of dividend growth. It's basically a bond proxy with pricing power. Lucas: Right. And look at the data. On June 25, the ten-year yield dipped one basis point to 4.40, and the two-year dropped two basis points to 4.09. The curve steepened slightly. Meanwhile, the S&P 500 is at 7,354, near all-time highs. Staples have been quietly grinding higher. They're not the flashiest part of the market right now — tech and AI are still dominating headlines — but for dividend portfolios, they're providing ballast. Luna: There's also the Fed factor. Minneapolis Fed President Kashkari said on Friday he still expects a rate hike this year. If the Fed does hike, short-term rates go up, but if the curve steepens because long-term rates rise even more, that's actually a bullish signal for staples. Lucas: Because a steepening curve can mean the market expects inflation or growth to pick up down the road. And if growth picks up, consumer staples companies can pass on higher costs. P&G has been raising prices on things like diapers and paper towels for two years now, and volumes have held up. That pricing power is exactly what you want in a dividend stock when the curve is steepening. Luna: So how does an investor actually position for this? Do you just buy P&G and Coke and call it a day? Lucas: You could do worse. But I think the smarter move is to look at the whole consumer staples sector through an ETF like VYM or SCHD. VYM, the Vanguard High Dividend Yield ETF, has a big weighting in staples. SCHD, the Schwab U.S. Dividend Equity ETF, leans more toward quality screens. Both are yielding around 3 percent right now. And they've held up well during the June sell-off in tech. Luna: But not all dividend ETFs are created equal. DVY, the iShares Select Dividend ETF, has a bigger tilt toward utilities and financials. In a steepening curve, financials can benefit but utilities get crushed. So you have to be selective. Lucas: That's a great point. The iShares Select Dividend ETF is down about 2 percent over the past month, while SCHD is roughly flat. The difference is the sector composition. DVY has 20 percent in utilities, which are getting hammered by rising long-term rates. SCHD has less than 5 percent in utilities and more in staples and healthcare. So the ETF you choose really matters right now. Luna: And if you're picking individual stocks, you want companies with strong free cash flow and a history of raising dividends through multiple rate cycles. That's the Dividend Aristocrats screen. Lucas: Which brings us back to P&G and Coke. But also Johnson & Johnson. J&J yields about 3.1 percent, and it's a rare combination of healthcare defensiveness and dividend growth. It's actually outperformed the S&P 500 this month. Even with all the talc litigation noise, the core business throws off huge cash flow. Luna: Interesting. So for a listener who's building an income portfolio today, what's the one takeaway? Lucas: Don't chase yield in a steepening curve. Telecoms like Verizon yield north of 6 percent, but they have high debt and capital expenditure needs. When long-term rates rise, their cost of capital goes up, and that can squeeze dividends. Staples and healthcare have lower yields but more sustainable growth. The total return over the next 12 months could be better from a 2.5 percent grower than a 6 percent payer that cuts. Luna: And we should also mention that the curve steepening might be signaling something about the economy. If it's steepening because of a flight to quality in short-term bonds, that's a recession warning. But if it's steepening because long-term rates are rising on growth expectations, that's different. Right now, we're in a mixed signal environment. Lucas: That's why I like staples. They work in both scenarios. If we get a recession, people still buy toothpaste. If growth picks up, P&G raises prices. It's a hedge within a dividend portfolio. And if you're listening and thinking about your own portfolio, this is exactly the kind of conversation we try to have on this show — no ads, no noise, just practical ideas. Luna: And we keep it ad-free because listeners like you support it. If these conversations have helped you think about a decision differently, you can find us at buy me a coffee dot com slash fexingo. That's a simple way to keep the show independent. Lucas: We really appreciate that. Now, back to the curve — one more thing I want to flag. The 30-year Treasury is yielding 4.86 percent, essentially flat from yesterday. That's the long end of the curve, and it's staying elevated. For dividend investors, that creates a real competition. If you can get nearly 5 percent risk-free for 30 years, why own a stock with similar yield but more risk? Luna: That's the million-dollar question. And the answer has to be dividend growth. A 30-year bond gives you a fixed coupon. A stock like P&G gives you a growing dividend. Over time, that growth compounds and can outpace the bond. That's the whole thesis of dividend growth investing. Lucas: Exactly. And historically, when the ten-year yield is above 4 percent, dividend stocks tend to underperform in the short run. But if you look at rolling 5-year periods, dividend growers still win. It's a patience game. And with the curve steepening, the market is essentially saying 'we don't know what the next 12 months look like, but we're willing to pay up for safety in the short end and demand a premium for long-term uncertainty.' That's a perfect environment for high-quality dividend stocks. Luna: So to sum up: steepening yield curve, favor consumer staples and healthcare, focus on dividend growth over raw yield, and be selective with ETFs. That's the playbook for late June 2026. Lucas: And we'll keep watching the curve. If it steepens further, or if the Fed actually hikes, we'll come back and revisit. For now, I'm comfortable owning P&G, Coke, and J&J in a dividend portfolio. Thanks for listening.