Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Stocks Are Hedging Against a Hawkish Fed
Transcript
- Lucas: So the S&P 500 is down about one point six percent over the past five days, but if you look at some of the biggest dividend payers, they're having a completely different week. Luna: Yeah, I saw that. Johnson & Johnson up over ten percent in five days. Altria up six percent. That's not exactly a market that looks scared. Lucas: Right. And this is happening while the Fed is signaling more tightening. Minneapolis Fed President Neel Kashkari said today he expects a rate hike this year. The 10-year Treasury yield is at four point four zero percent. Normally that should punish income stocks, but it's not playing out that way. Luna: What's the disconnect? Are investors just ignoring the hawkish talk? Lucas: I think it's more that they're pricing in a very specific scenario. The curve is steepening — the spread between the 10-year and the 2-year is now thirty-one basis points. That's up from thirty. A steepening curve is actually good for financials and for companies with pricing power, which a lot of dividend aristocrats have. Luna: So you're saying the market is treating a potential rate hike as a sign of economic strength, not a policy mistake? Lucas: Exactly. If the Fed hikes because the economy is running hot, then companies like Johnson & Johnson and Procter & Gamble can pass through higher costs. Their dividends are safer. And with the 10-year at four point four, the bar is higher — you need dividends that can grow faster than that yield to justify owning the stock. Luna: Let's talk about that bar. A lot of investors just look at the headline yield. But if the 10-year is four point four, a stock yielding three percent looks weak unless it's growing its dividend. Lucas: That's the key distinction. Johnson & Johnson yields about three percent, but they've raised their dividend for sixty-something consecutive years. Their growth rate is around five to six percent annually. So total return potential is eight to nine percent. That beats the ten-year. Compare that to a REIT like Realty Income — yields about five and a half percent, but their dividend growth is slower, maybe three to four percent. Still, at five and a half percent current yield, you're already above the Treasury. Luna: And Realty Income is up four point two percent this week. So the market is rewarding that yield premium. Lucas: Right. But you have to be careful. Not all high yields are safe. Look at Verizon — yields around six and a half percent, but it's up only two point six percent this week. The market is questioning their growth. They have a lot of debt, and if rates stay high, that debt service eats into cash flow available for dividends. Luna: So it's not just about yield. It's about dividend coverage ratio, free cash flow, and the ability to grow. Lucas: Exactly. And that's where the dividend growth ETFs like SCHD have done well. SCHD is up one point four percent this week, while VYM, which focuses on high yield, is down a tenth of a percent. The market is rewarding quality over raw yield right now. Luna: That makes sense with the curve steepening. But what about the broader market? The NASDAQ is down over three percent this week. Tech is getting hammered. Dividend stocks are a safe haven in that rotation. Lucas: They are. And it's not just defensive positioning. There's actual cash flow. When Treasury yields rise, the discount rate for future earnings goes up, which hurts growth stocks more than value stocks. Dividend stocks have current cash flows that are less sensitive to that discount rate effect. Luna: So for the dividend investor right now, what's the play? Do you go with the high yield names or the growers? Lucas: I lean toward the growers. If the Fed does hike again, the economy might slow, and high-yield stocks with shaky fundamentals could cut dividends. The aristocrats have proven they can maintain payouts through multiple cycles. Johnson & Johnson, Procter & Gamble, Coca-Cola — those are the ones I'd overweight. Luna: Coca-Cola is up almost four percent this week. And it yields around three percent with steady growth. Lucas: Right. And their brand pricing power is enormous. They can raise prices with inflation. That's the kind of moat you want when the ten-year is at four point four. Luna: One thing I've noticed is that the DVY ETF, which tracks the Dow Jones Select Dividend Index, is up two point six percent this week. That index screens for high dividend yield but also for things like dividend growth and payout ratio. So it's a middle ground. Lucas: Good point. DVY has done well. It's a reminder that you don't have to go to extremes. A blended approach — some pure growers, some high yield with discipline — works in this environment. Luna: And what about sector allocation? Utilities are usually a dividend favorite, but they're sensitive to rising rates because of their debt. Lucas: Utilities have been mixed. Some are up, some down. I'd focus on regulated utilities with strong rate case outcomes. But honestly, consumer staples and healthcare are the sweet spot right now. They have less debt than utilities and more pricing power. Luna: So basically, the dividend trade is alive and well, but you have to be selective. You can't just buy the highest yielders and hope. Lucas: That's the takeaway. This isn't a blanket 'dividends are back' story. It's 'quality dividends with growth are back.' And if you own the right names, you're getting paid while the rest of the market figures out what to do. Luna: Before we wrap, I want to mention something. We keep this show ad-free and listener-supported. If today's episode helped you think about your portfolio differently — maybe you decided to swap a high-yield name for a grower, or you're feeling more confident holding through this environment — that's exactly why we do this. Lucas: Yeah. And if it was worth the price of a coffee to you, that's the link — buy me a coffee dot com slash fexingo. It genuinely helps us keep the lights on and the research flowing. Luna: Exactly. No pressure. Just if you find value here. Now, back to the numbers — one more thing I wanted to ask about is the role of REITs like Realty Income in a rising rate environment. Lucas: Good question. Realty Income has a lot of long-term leases with built-in rent escalators. So their cash flows grow with inflation. That's why they've held up. As long as they can keep funding those dividends with growing rent, they'll be fine even if rates go up a bit more. Luna: So bottom line for June 2026: dividend investing isn't dead. It's just demanding more homework. Lucas: It always did. But right now, the homework is paying off. Thanks, Luna. Luna: Thanks, Lucas. See you next time.