Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / The Hidden Inflation Tilt in Dividend ETFs in July 2026
Transcript
- Lucas: So it's July 5th, 2026, and if you look at the five-day performance numbers for the broad market, the S&P 500 is up about 1.8 percent. But here's the thing — a bunch of dividend ETFs are actually keeping pace or even beating that, despite the ten-year Treasury yield pushing up to 4.48 percent. Luna: Right, I saw that. VYM up 0.8 percent in five days, SCHD up 0.9 percent. That's not huge, but it's in line with the S&P. And these are funds that people usually think of as 'defensive' — so they should lag in a risk-on rally. Lucas: Exactly. And that's the puzzle I want to unpack today. Normally when bonds yield 4.48 percent and stocks are rallying, dividend payers get left behind because growth stocks become more attractive and bonds start to compete for income dollars. But that's not happening right now. Luna: So what's the secret sauce? Is it just that these ETFs are heavy on consumer staples and healthcare, which have pricing power? Lucas: That's exactly it. If you look under the hood of VYM, which tracks the FTSE High Dividend Yield Index, its top sectors are financials, consumer staples, and healthcare. And SCHD, the Schwab U.S. Dividend Equity ETF, is even more tilted — it has about 30 percent in consumer staples and maybe 15 percent in healthcare. These are sectors that can pass along higher costs to customers. Luna: And that's crucial when the fed funds rate is stuck at 3.63 percent and inflation is still above the Fed's target. Companies that can raise prices without losing customers — that's a real moat. Lucas: By the way, if our money conversations have helped you think about a decision differently — maybe rebalancing your portfolio or choosing between a dividend ETF and a bond ladder — and you want to see more of them, we keep this show ad-free because of listener support. People like you pitch in at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small way to keep the lights on. And we really appreciate it. Now back to the inflation tilt — Lucas, you were saying these sectors have pricing power, but what about utilities? They're usually a big part of dividend ETFs, but they've been getting crushed. Lucas: Great point. Utilities are rate-sensitive because they carry a lot of debt and their regulated returns look less attractive when Treasuries yield 4.48 percent. The utility sector as a whole is down maybe 3 percent in the last month. But VYM has only about 6 percent utilities, and SCHD has even less. So they sidestepped that landmine. Luna: And then there's Verizon. Down 8.6 percent in five days. That's a classic high-yield stock that got hammered because its dividend looks fragile when rates rise. But neither VYM nor SCHD holds a lot of telecom — maybe 3 percent each. Lucas: Right. So the compositional tilt is doing a lot of work. And then there's the dividend growth factor. SCHD specifically selects stocks that have sustained dividend growth for at least ten years. That filters out the highest-yielding names that might be value traps and instead picks companies like Coca-Cola, PepsiCo, Procter & Gamble — names that have raised dividends for decades. Luna: Coca-Cola is up 1.8 percent in five days. Procter & Gamble up 1.6 percent. Those are in line with the market. And Johnson & Johnson — up 3.3 percent. That's actually beating the S&P. Lucas: And Johnson & Johnson is interesting because it's healthcare, which is another sector that benefits from demographic tailwinds and inelastic demand. People need their medicines and medical devices regardless of the rate environment. So J&J can grow earnings and dividends even when the ten-year is at 4.48 percent. Luna: So the narrative that 'dividend stocks always underperform when bond yields rise' is too simplistic. It depends on which dividend stocks. Lucas: Exactly. And I think the market is starting to price that in. Look at the yield curve — the spread between the ten-year and the two-year is now 35 basis points, up from 31 basis points just a few days ago. That steepening usually signals that the economy is resilient, which is good for consumer spending and corporate profits. And that benefits the kind of companies that dominate these dividend ETFs. Luna: So the steepener itself is a tailwind for dividend growers? That's a bit counterintuitive. Lucas: It is, but think about it: a steepening curve often means the market expects growth and inflation. Consumer staples and healthcare companies can raise prices in that environment. Meanwhile, the flat fed funds rate at 3.63 percent means borrowing costs aren't rising further for now, so these companies' debt loads are stable. It's a sweet spot. Luna: I want to go back to something you said about pricing power. Can you give me a concrete example of how a company like Procter & Gamble actually passes on costs? Lucas: Sure. P&G reported last quarter that they raised prices across their home care and fabric care segments by about 5 percent year-over-year, and volume declined only 1 percent. So net revenue went up. That's pricing power in action. And because their input costs — like commodities and logistics — are also rising, the margin compression is manageable. Luna: And that's exactly what a dividend ETF investor wants to own. Not the company that has to fight tooth and nail to protect margins, but the one that can just pass it through. Lucas: Right. And that's why I think the market is rewarding these ETFs right now. It's not just about yield — it's about the quality of the yield. A 3.3 percent yield from a company that can grow its dividend 6 percent a year is worth more than a 5 percent yield from a company that might cut. Luna: And speaking of cuts, Altria is down 1.5 percent in five days. That's a high-yield name that has been struggling with volume declines in cigarettes. Its dividend yield is over 8 percent, but the market is signaling risk. Lucas: Exactly. And that's the kind of stock that gets weeded out of dividend growth ETFs like SCHD. SCHD's yield is around 3.5 percent, but its dividend growth rate is over 10 percent annually over the past five years. That's a much better total return proposition. Luna: So for someone listening who wants to add dividend exposure in July 2026, what's the takeaway? Do you lean into these inflation-resilient ETFs, or do you pick individual names? Lucas: I think for most people, a fund like SCHD or VYM is the right move. You get diversification across 100-plus stocks, all with a proven track record of paying and growing dividends. And as we've seen, the composition naturally avoids the sectors that are getting crushed by rising rates. Individual stock picking is fine if you have the time and expertise, but these ETFs are doing the heavy lifting for you. Luna: And they're cheap too. SCHD has an expense ratio of 0.06 percent. VYM is 0.06 percent. So you're not giving up much in fees. Lucas: Right. And compare that to a bond fund yielding 4.48 percent — after fees and taxes, the after-tax yield might be similar to a dividend ETF's 3.5 percent yield, but the dividend ETF has upside from dividend growth and capital appreciation. That's a valuable optionality. Luna: One thing I'm curious about — the DVY, the iShares Select Dividend ETF, is up only 0.6 percent in five days. That's a bit behind VYM and SCHD. Why the difference? Lucas: DVY focuses on the highest dividend yields, so it has a bigger weighting in utilities and telecom. Those sectors are getting hurt. DVY has about 20 percent utilities, whereas VYM has 6 percent. So DVY is more exposed to the rate-sensitive names. That's the trade-off: higher yield, but more volatility and interest rate risk. Luna: So the market is clearly making a distinction between high yield and quality yield. And the quality yield is winning right now. Lucas: Absolutely. And I think that's the story of July 2026 so far. The ten-year at 4.48 percent is punishing the weakest hands in the dividend space — the companies with high payout ratios, high debt, and limited pricing power. But the ones with strong brands, global scale, and pricing power are holding up just fine. Luna: And if the curve keeps steepening, that could actually accelerate. Because a steeper curve means the economy is growing, which is good for consumer spending and healthcare demand. Lucas: Right. The one risk I'd flag is if the Fed is forced to hike again. But right now the fed funds rate is flat at 3.63 percent, and the market isn't pricing in a hike. So the environment for dividend growers remains supportive. Luna: Alright, so the key takeaway: don't lump all dividend stocks together. Look under the hood. ETFs like SCHD and VYM have a natural tilt toward inflation-resistant sectors, and that's why they're holding up in a 4.48 percent world. Lucas: Exactly. And if you're building a portfolio for the long haul, that inflation tilt is probably something you want to have. Because even if rates come down eventually, these companies will keep raising dividends and compounding your returns. Luna: Good place to leave it. Thanks, Lucas. Lucas: Thanks, Luna. Talk to everyone next time.