Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Growth Stacks Up Against High Yield in Mid-2026
Transcript
- Lucas: So we're a few days into June 2026, and I keep coming back to the same question: if you're investing for income right now, do you go for high yield or dividend growth? And I don't think the answer is as obvious as it used to be. Luna: Because the yield curve is steepening, short-term rates are still elevated — the Fed funds rate is at 3.63 percent — and we've got the 10-year Treasury at 4.49 percent. That changes the math. Lucas: Exactly. And I think the best way to look at this is through two specific stocks that represent each camp. On the high-yield side, let's talk about Realty Income, ticker O — the monthly dividend REIT. It's yielding around 5.8 percent right now, but it's down 2.5 percent over the past five days. Luna: And on the growth side, Coca-Cola, ticker K-O. It's yielding about 3.1 percent, but it's also down 2.8 percent over the same period. So both are getting hit, but for different reasons. Lucas: Right. And this is where I think the conversation gets interesting. A lot of investors see a 5.8 percent yield on O and think, that's a no-brainer. But you have to ask: is that yield sustainable, and is the total return going to be there over the next five years? Luna: And with Coca-Cola, you're getting a lower yield, but the dividend has been growing for over 60 years. That compounding effect is powerful. Lucas: Before we dive deeper, I want to mention something quickly. A couple of people have asked how we keep this show ad-free, and honestly, it's because of listeners who chip in a few dollars a month. If you've gotten something out of these conversations, you can support us at buy me a coffee dot com slash fexingo. It genuinely makes a difference. Luna: Yeah, it's a small thing that keeps the lights on. And we really appreciate it. Lucas: So back to the comparison. Let's look at Realty Income's business model. It's a triple-net lease REIT, meaning tenants pay for insurance, taxes, and maintenance. That's a stable income stream, but it's also tied to the health of the retail and industrial sectors. If we see a slowdown, those tenants could struggle. Luna: And Coca-Cola is a consumer staple. People still buy soda and sports drinks even in a recession. That's why its dividend is considered very safe. Lucas: Exactly. And the data backs that up. Johnson & Johnson, ticker J-N-J, is another dividend growth stalwart. It's up 1.3 percent over the past five days, and it yields around 3 percent. That's a nice combination of capital preservation and income. Luna: But JNJ is also facing legal headwinds with talc litigation. That's a risk that dividend growth investors have to weigh. Lucas: For sure. No stock is risk-free. But the point is, with a dividend growth stock, you're betting on the company's ability to increase its payout over time. With a high-yield stock like O, you're betting on the current income being maintained, but the dividend growth is much slower. Luna: And in a rising rate environment, REITs like O can get squeezed because their cost of capital goes up. Realty Income has a lot of debt, and when the 10-year is at 4.49 percent, that's a headwind. Lucas: Right. Meanwhile, Coca-Cola has a fortress balance sheet. It generates massive free cash flow, and it can easily cover its dividend. In fact, its payout ratio is around 75 percent, which is very manageable. Luna: So for a retiree who needs income now, O might make sense. But for someone with a longer time horizon, dividend growth seems like the better play. Lucas: I'd agree. And there's another angle: tax treatment. O's dividends are mostly non-qualified because it's a REIT, so they're taxed as ordinary income. Coca-Cola's dividends are qualified, taxed at the lower capital gains rate. That's a real difference for taxable accounts. Luna: Good point. So if you're in a high tax bracket, the after-tax yield on O might be closer to 4 percent, while Coke's effective yield could be 2.5 percent after taxes. That narrows the gap. Lucas: Exactly. And that's why I think investors need to look beyond the headline yield. Let's run a quick hypothetical. Say you invest $10,000 in O at a 5.8 percent yield. That's $580 in annual income before taxes. After taxes at, say, 30 percent, you're left with about $406. Luna: Now with Coke at 3.1 percent, that's $310 before taxes, but at a 20 percent qualified dividend rate, you keep $248. So the gap is $158, not $270. Lucas: Right. And then you have to consider dividend growth. If Coke grows its dividend by 5 percent per year, in five years your yield on cost is about 3.9 percent. O might grow at 2 percent, so your yield on cost goes to about 6.4 percent. But the gap in after-tax income narrows further because of compounding. Luna: And if O cuts its dividend during a downturn, which REITs have done historically, that advantage evaporates. Lucas: That's the key risk. High yield often comes with higher risk. And in the current environment, with the yield curve steepening, I think investors are starting to price in a higher probability of recession. That's why you're seeing defensive stocks like Coke and JNJ hold up relatively well, while O is down. Luna: But let's not forget that O has a very long track record of paying dividends, and it's increased its payout for over 25 years. It's not a speculative yield trap. Lucas: No, it's not. And I own O in my own portfolio. But I think it's important to understand the trade-offs. For an investor who needs current income and is comfortable with the risk, O is fine. But for someone who can afford to wait, dividend growth stocks offer a better risk-adjusted return over the long term. Luna: So what's the takeaway for our listeners? Should they be tilting toward one or the other right now? Lucas: I think the smart move is to have both. Use dividend growth stocks as the core of your portfolio, and then add high-yield positions opportunistically when they're undervalued. Right now, O is down, but it's not cheap by historical standards. I'd wait for a better entry point. Luna: And with the 10-year at 4.49 percent, you can also consider Treasury bonds or bond ETFs for the income portion. That's a risk-free 4.5 percent, which is competitive with O's after-tax yield. Lucas: That's a great point. The competition from bonds is real. And that's why I think dividend growth stocks are more attractive right now — they offer a growing income stream that can outpace inflation, while bonds give you a fixed nominal return. Luna: So to sum up: know your tax situation, know your time horizon, and don't chase yield blindly. Lucas: Exactly. And as always, do your own research. The numbers are out there, and we've given you a framework to think about it. Thanks for listening, and we'll see you next time.