Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Dividend Investors Should Watch the 30-Year Treasury
Transcript
- Lucas: So the 30-year Treasury just crossed five point one nine percent, and I think that's the single most important number for dividend investors right now, more than the Fed funds rate or even the two-year. Luna: Five point one nine? That's up from, what, around four point eight at the start of the year? Lucas: Yeah, and it's been creeping up all summer. The ten-year is at four point six seven, the spread between the ten and the two has narrowed to about thirty-nine basis points, but the long end is where the action is. And for anyone who owns dividend payers, that long rate is the real competitor. Luna: Because if you can get five percent plus from a government bond with zero default risk, why would you take on equity risk for a similar yield? Lucas: Exactly. I mean, look at Realty Income, ticker O, trading around sixty-two dollars, down one point nine percent over the past five days. Its dividend yield is about five point four percent. The 30-year is at five point one nine. The spread is razor thin, and that's before you even factor in the risk of a dividend cut or the volatility of the stock price. Luna: And that's a REIT, so it's particularly rate-sensitive. But we're seeing it in consumer staples too, right? Coca-Cola down two and a half percent this week. Lucas: Right, Coca-Cola at eighty-nine sixty-six, down two and a half percent in five days. Johnson and Johnson down one point three. Procter and Gamble down one point nine. Even utility-like names are getting hit. And I think the common thread is duration, not quality. These are bond proxies, and when the long bond yields more, they lose their relative appeal. Luna: So talk me through duration. It's a bond concept, but you're applying it to stocks. Lucas: Right, duration measures how much a bond's price moves when interest rates change. Long-duration bonds are more sensitive. Well, dividend stocks can be thought of the same way. A stock like Coca-Cola, with decades of consistent dividend growth, is essentially a very long-duration asset. Its value depends on cash flows far into the future, so when long-term rates go up, the present value of those future cash flows goes down, and the stock gets repriced. Luna: So higher long-term rates are a direct headwind for these 'dividend aristocrats' that we've talked about so much. Lucas: Exactly. And that's why the 30-year matters more than the Fed funds rate for these names. The Fed funds rate is at three point six three, it's been flat. But the long end is set by inflation expectations, term premium, fiscal deficits, all kinds of things. And when the long end moves, it hits the stocks that behave like long-duration bonds. Luna: So what does that mean for someone who's building an income portfolio? Should they just pile into the 30-year and call it a day? Lucas: Well, it's tempting, but there's a key difference: dividend stocks offer the potential for growth. Coca-Cola raises its dividend every year, and it's been doing it for over sixty years. That's a stream of growing income that a fixed-rate bond can't match. But the market is telling you that growth isn't free, and you're paying for it with more risk and more sensitivity to rates. Luna: And I guess it depends on your time horizon. If you're retired and need cash now, the bond might be fine. But if you're decades away, dividend growth can compound. Lucas: Yeah, and that's the key point. The 30-year at five point one nine percent is a serious alternative, but it's not a direct substitute. You have to think about your own cash flow needs and your tolerance for volatility. And speaking of which, we should mention something here. We're able to have these conversations because we don't run ads on this show. We're listener-supported, and if that's something you value, you can help keep it that way at buy me a coffee dot com slash fexingo. It's a small gesture, but it goes a long way in keeping these episodes ad-free and focused on content like this. Luna: Yeah, it's a nice way to support the show without any strings attached. And we do appreciate it. Lucas: So back to the numbers. The market's reaction this week has been interesting – the S&P 500 is up, the NASDAQ is up, but dividend payers are lagging. The Russell 2000 is down. That tells me investors are willing to take on risk, but they're also demanding more from their income investments. Luna: And interestingly, Altria, the tobacco giant, is actually up this week, which is usually a high-yield play. Why is that? Lucas: Altria's yield is around eight percent, which is much higher than the 30-year. So even with the long bond at five point one nine, there's still a significant spread. Plus, Altria has a lot of pricing power and generates steady cash flow, so investors seem to be looking past the long-term regulatory risks for now. Luna: So it's not a blanket sell-off in dividend stocks. It's more about relative yield and duration. Lucas: Precisely. And that's why I think we need to be more nuanced about how we evaluate dividend stocks in this environment. High yield isn't automatically bad, but you have to ask: is the yield sustainable? And how sensitive is that cash flow to changes in long-term rates? Luna: And that's where the payout ratio comes in, which we've talked about before. Lucas: Right, a high payout ratio can be a warning sign, but it's not the whole story. You need to look at the free cash flow, the debt levels, and the stability of the earnings. For instance, a utility might have a high payout ratio but very predictable cash flows, while a cyclical company might have a low payout ratio but volatile earnings. Luna: So what's the takeaway for our listeners today? Should they be worried about their dividend stocks? Lucas: I wouldn't say worried, but I would say be aware. The 30-year at five point one nine percent is a reference point that every income investor should have in mind. It's not a reason to panic, but it's a reason to reassess your portfolio's duration exposure. If you're heavily weighted in low-growth, high-dividend stocks, you might feel more pain if rates keep rising. Luna: And maybe it's a time to consider some dividend growers with shorter duration, like tech companies that are starting to pay dividends? Lucas: That's a great point. Some of the tech names have started paying modest dividends, and they have strong balance sheets and growth potential. They might offer a better balance between income and growth in a rising-rate environment. But they're not for everyone, and you still have to do your homework. Luna: So, bottom line: the 30-year is a signal, not a verdict. Lucas: Exactly. It's a tool for context. Use it to measure the opportunity cost of your dividend investments. And if you're comfortable with the risk, a stock like Realty Income might still be worth it, but you have to go in with your eyes open. Luna: And if you're not comfortable with that volatility, maybe a bond ladder with some shorter-term treasuries is more your speed. Lucas: Right. There's no one-size-fits-all answer. The key is to understand what you own and why you own it. And with the 30-year at five point one nine, that question becomes even more important. Luna: Well, thanks for breaking that down, Lucas. I know I'm looking at my own portfolio a little differently now. Lucas: That's what we're here for. And if you want to dig deeper into any of these ideas, we'll have more in future episodes. Until then, keep your eyes on the long end.