Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Consecutive Dividend Increases Compound Wealth
Transcript
- Lucas: You know, with the S&P 500 down about 2.8 percent over the last five days and the Nasdaq dropping more than 5 percent — I've been thinking about what actually holds up in a shaky market. Luna: I'm guessing you're going to say dividend stocks? Lucas: Not just any dividend stocks — specifically the ones that raise their payout year after year. I'm talking about companies that have been increasing dividends for decades. Luna: Like the Dividend Aristocrats? The ones with 25-plus years of consecutive increases. Lucas: Exactly. But I want to zoom in on the ones with even longer streaks — the kind that have survived recessions, rate cycles, everything. Coca-Cola has raised its dividend for 63 consecutive years. Johnson & Johnson is at 62. Luna: Sixty-three years is wild. That goes back to the early 1960s. Lucas: It does. And the reason that matters isn't just the income — it's the compounding. If you'd bought Coke stock in 2000 and reinvested every dividend, your effective yield on your original cost today would be well north of 6 percent. The stock yields about 3 percent at current prices. Luna: Right, because the payout keeps growing while your cost basis stays fixed. Lucas: That's the whole idea. And it's not just Coke. Over the past five days, Coke is up about 1.1 percent, J&J is up 4.1 percent, Procter & Gamble up 4.5 percent. Meanwhile the broad market is down. Luna: So in a week where the jobs report scared everyone about rate cuts, these defensive growers actually held up. That's interesting because the headlines were all about the hot jobs report pushing rate cuts further out. Lucas: Right. The ten-year yield dropped a bit — from 4.49 to 4.47 — but the two-year also fell. The spread actually narrowed. The market is still trying to figure out what the Fed does next. And in that uncertainty, investors gravitate toward reliability. Luna: And a 63-year track record of raising dividends is about as reliable as it gets. Lucas: Precisely. Now, a lot of people chase high yield — and I get it, who doesn't want a 5 or 6 percent yield? But high yield often comes with higher risk. Altria yields over 8 percent, and we talked a few episodes ago about the pressure on that dividend from declining volumes. Luna: Yeah, Altria is up 5.2 percent this week though. That's a big move. Lucas: It is. But the dividend growth story is different. You're not just collecting a check — you're buying a rising income stream. Over 20 or 30 years, that makes a massive difference. Luna: And the math is pretty simple. If a stock yields 3 percent but grows its dividend 6 percent a year, in 12 years your yield on cost doubles. Lucas: Exactly. And that's before any price appreciation. Historically, reinvested dividends have accounted for about 40 percent of the S&P 500's total return. For dividend growers, it's even higher. Luna: So for someone listening who's building a portfolio right now — with the market jittery, Nasdaq down 5 percent in a week — what's the move? Buy Coke? Buy J&J? Lucas: I'd say start with the Dividend Aristocrats list, but filter for the ones with the longest streaks and sustainable payout ratios. You want companies that generate enough free cash flow to cover the dividend and still invest in the business. Luna: Payout ratio under 60 percent? Something like that? Lucas: For most, yeah. Coke's payout ratio is around 74 percent, but its cash flow is so steady that it's manageable. J&J is around 60 percent. Procter & Gamble is in the 60s. The key is that the dividend is covered by earnings, not debt. Luna: And you mentioned the jobs report. The yield curve is still positive — ten-year at 4.47, two-year at 4.05. That's a 42 basis point spread. Historically, that's a decent environment for dividend stocks. Lucas: It is. Short-term rates are still high enough that cash is an option, but if you're investing for income over the long term, locking in growing dividends now makes a lot of sense. Especially if rates eventually come down. Luna: Because when rates fall, bond yields drop, but your dividend stream keeps growing. Lucas: Right. And that's the compounding engine. One thing I want to mention — and this is a little behind the scenes — but the reason we can do so many episodes like this, drilling into specific strategies, is that a small group of listeners chips in each month. You can find that at buy me a coffee dot com slash fexingo. Luna: Yeah, it's a small but really meaningful group. It keeps the show ad-free and lets us go deep on stuff like this without worrying about fitting in commercial breaks. Lucas: Exactly. So if you've gotten value from our conversations — whether it's dividend growth or anything else — that's the way to support. And it genuinely helps us keep making these. Okay, back to the compounding math. Luna: So let's say someone buys $10,000 worth of J&J today, yielding about 3.1 percent. If they reinvest dividends and J&J keeps raising at 5 percent a year, what does that look like in 20 years? Lucas: Ballpark? Their annual dividend income would be around $1,700 on that original $10,000. That's a 17 percent yield on cost. And the stock itself has likely appreciated. Luna: Seventeen percent yield on cost. That's why long-term investors love these names. Lucas: And it's not just healthcare and consumer staples. You also have industrial and financial companies with long streaks. Lowe's has raised for over 50 years. Even some tech companies like Microsoft have been raising for over 20 years. Luna: But tech dividends are newer, right? Microsoft started paying in 2003. Lucas: Yes, but they've raised it almost every year since. The point is, you don't need a 5 percent yield to build wealth. You need a growing yield over time. Luna: And in a week where the Nasdaq is down 5 percent, it's reassuring to have names that are actually up. Lucas: Exactly. Coke, J&J, P&G — all positive. Altria too, but that's a different story. The dividend growth names are acting as a cushion. Luna: One thing I've been thinking about — does the current rate environment change the calculus for dividend growth versus high yield? Because you can still get 4.5 percent on a ten-year Treasury. Lucas: It does change the short-term comparison. But remember, a Treasury bond's payments are fixed. A dividend growth stock's payments increase. Over 10 years, that Coke dividend will likely be 30 to 40 percent higher. The bond's coupon won't budge. Luna: So it's really a question of time horizon. If you need income now, maybe the bond wins. But if you're building for the long run, the stock is hard to beat. Lucas: That's the trade-off. And for most of our listeners, I'd guess the long run is the goal. Luna: Alright, so practical takeaway: look at the Dividend Aristocrats, focus on payout ratio and free cash flow, and consider dollar-cost averaging into names with 30-plus year streaks. Lucas: And use DRIP — automatic dividend reinvestment — to make it hands-off. That's how the compounding really takes off. Luna: One last question: with the Fed likely on hold for a while, do you think dividend growth stocks will continue to outperform high yield? Lucas: I think they'll be more resilient. High yield often correlates with higher risk — energy, tobacco, REITs in some cases. Dividend growth tends to be more defensive. And in a market that's nervous, defensive wins. Luna: Good note to end on. Thanks Lucas. Lucas: Thanks Luna. See you next time.