Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Dividend Investing in the New Rate Normal
Transcript
- Lucas: So, Luna, I was looking at the tape today, and something caught my eye — Altria up three point three percent in a week. That's a big move for a stock that usually trades like a bond. Luna: Three point three? That's huge for a dividend name. What's driving it? Lucas: Well, part of it is the market rotation into high-yield, defensive names as the Fed holds rates at three point six three. But it's also a reminder that Altria's yield is still north of six percent, and that kind of income is getting harder to find. Luna: Right, because the ten-year Treasury is at four point six four. That's a big gap from what you could get just a couple years ago. Lucas: Exactly. And that's the real story of 2026 — the dividend landscape has shifted. For a long time, you could just buy a high-yield stock and call it a day. But now, with bond yields this high, you have to be more careful about which dividends are actually sustainable. Luna: So how do you tell the difference? I mean, Altria's yield is tempting, but there's so much talk about tobacco being in decline. Lucas: That's the thing. It's not about the yield by itself, it's about the payout ratio and free cash flow. Altria generates massive amounts of cash, even as volumes decline. That's what supports the dividend. But other high-yielders aren't so lucky. Luna: Like Realty Income? It's down one point four percent this week, which isn't great. Lucas: Realty Income is a great example. It's a REIT, so it pays out most of its earnings as dividends. But its payout ratio is around eighty percent, and with interest rates staying higher for longer, the cost of capital is up. That's a double whammy. Luna: So you're saying the dividend is safe, but the growth might be limited? Lucas: Exactly. And that's where the new rate normal comes in. We're not in a zero-rate world anymore. The ten-year at four point six four, the two-year at four point one seven — that changes the math for everyone. Luna: But some companies are actually benefiting from this. I saw Verizon up two percent this week, and it's yielding around six point five percent. Lucas: Right, and that's a stock that's been able to maintain its dividend because of its cash flow and its customer base. But the yield is high because the market is worried about its debt load. You have to weigh that risk. Luna: So it really comes down to understanding the business, not just the yield. Lucas: That's the core lesson. And it's why we're drilling into this today. Because there's a lot of noise out there — people chasing the highest yields, or the longest dividend streaks, without looking at the underlying fundamentals. Luna: And honestly, if today's conversation helps you think about your portfolio differently, that's worth a coffee. You can find us at buy me a coffee dot com slash fexingo. It's a small way to keep this show ad-free. Lucas: Yeah, no pressure. But it does help. And we're glad to have you listening either way. Luna: So, let's get back to the real meat. You mentioned payout ratios — how do you actually use that in practice? Lucas: So, a payout ratio is just the percentage of earnings a company pays out as dividends. A ratio above eighty percent can be a red flag, unless the company has very stable cash flows, like a utility or a tobacco company. Luna: But Altria's payout ratio is over a hundred percent, right? Lucas: It is, if you look at GAAP earnings. But that's because they take a lot of charges. If you look at free cash flow, it's actually much lower. That's the nuance. Luna: So free cash flow is the better metric? Lucas: For dividend safety, yes. A company can pay a dividend from earnings, but if it's not generating actual cash, that dividend won't last. Look at a company like AT&T a few years ago — they cut their dividend because their free cash flow didn't cover it. Luna: And that's the classic example. But what about the dividend aristocrats? They've raised dividends for decades. They must be doing something right. Lucas: They are, but even they can be misleading. We talked about that in an earlier episode. The streak is great, but if the payout ratio is creeping up, the streak could end. Look at 3M — they cut their dividend a couple years ago after a long streak. Luna: So you have to look beyond the streak. Lucas: Exactly. And that's especially important in this environment. With the ten-year at four point six four, you can get a decent yield from bonds. So your dividend stocks need to offer something more — either growth or a really safe yield. Luna: Where does that leave the average income investor? Lucas: It means you have to be more selective. Some investors are gravitating toward dividend growth funds like SCHD, which focuses on quality and consistent growth, rather than the highest yield. That seems to be a smarter play right now. Luna: SCHD is up zero point six percent this week, same as VYM. They're both holding up. Lucas: And that's the thing — in a flat rate world, you don't need to reach for yield. You need companies that can grow their dividends over time. That's what will protect you against inflation and give you a real return. Luna: So what's your takeaway for someone listening right now? Lucas: Look at the free cash flow, not just the yield. And check the payout ratio on a cash basis. If a company's dividend is covered by actual cash, and it's growing, that's a solid bet. If not, you're taking on more risk than you might think. Luna: And don't forget about the interest rate environment. With rates where they are, you have options. Don't settle for a risky dividend when you can get a decent bond yield. Lucas: That's a great point. The ten-year at four point six four is a real alternative. So your dividend stocks need to earn their place in your portfolio. Luna: So, let's talk about one more thing: the steepening curve. We've mentioned it, but what does it actually mean for dividend stocks? Lucas: The curve is steepening because long-term yields are rising faster than short-term. That's a sign that the market expects growth or inflation. For dividend stocks, it can be a headwind because higher long-term rates make future cash flows less valuable. Luna: So that's why Realty Income is down? Lucas: Partly. REITs are sensitive to long-term rates because they borrow a lot. But it's also about the dividend yield relative to bonds. If the ten-year is at four point six four, a REIT yielding five point five percent isn't as compelling as it used to be. Luna: But some companies can still grow through that. I'm thinking of the ones with pricing power. Lucas: Absolutely. Companies that can raise prices to keep up with inflation, like consumer staples, tend to do better. Procter & Gamble and Johnson & Johnson are up over one percent this week. They have the ability to grow their dividends even in a steepening environment. Luna: So, it's not about avoiding dividend stocks altogether, it's about choosing the right ones. Lucas: Exactly. And that's the nuanced take. We're not saying dividends are dead. We're saying you have to be more strategic. Luna: So, if I'm starting out, what's my first step? Lucas: Start with a diversified dividend ETF, like VYM or SCHD, and then if you want to add individual stocks, do your homework on free cash flow and payout ratios. And perhaps most importantly, keep an eye on the ten-year Treasury as a benchmark. Luna: That's a solid plan. And remember, we're here to help you think through these decisions. If today's episode gave you a new perspective, consider supporting us at buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small gesture that keeps us going. But no pressure. We've got more episodes coming, so stay tuned. Luna: Until next time, keep your dividends growing.