Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Dividend Stocks Are Breaking Down with the Economy
Transcript
- Lucas: The S&P 500 is down about 1.1 percent over the past five days — that's a pause, not a panic. But if you look under the hood at the dividend-heavy names, the picture is much uglier. Luna: Yeah, SCHD is off 2.3 percent. VYM down 0.7, but that one's a bit of an outlier. Realty Income lost 2.5 percent. And Verizon — oof, down 3.6 percent. Lucas: Right, and that's the story I want to dig into today. Because when you see dividend stocks getting hit harder than the broad market, it's usually a sign that something is shifting under the surface. The 10-year Treasury yield has dipped to 4.46 percent — down from 4.49 percent just a few days ago. That should be good for income stocks, right? Lower competition from bonds. Luna: That's what I would have thought. So what's going on? Lucas: I think the market is repricing risk — not just interest rate risk, but economic risk. The yield on the 30-year is also down, to 4.90 percent. That's a classic flight to safety move. Money is moving into Treasuries because investors are getting worried about growth. And when growth fears hit, dividend stocks that are tied to consumer spending and real estate get sold off first. Luna: So it's not about yield competition. It's about whether those dividends are safe. Lucas: Exactly. Take Verizon. The stock yields over 5 percent now, and it's down 3.6 percent in five days. That's not a yield play — that's a market saying 'we're not sure the cash flow holds up.' Same with Realty Income. A 2.5 percent drop in a stock that is supposed to be a steady Eddy is a warning. And then you have the consumer staples — KO down 1.7 percent, PG down 1.8 percent, JNJ down 1.9 percent. Those are not panic numbers, but they're consistent with a slowdown story. Luna: Let's talk about the Fed angle. The effective fed funds rate is still at 3.63 percent. But we had that headline about Alan Greenspan passing — and Kevin Warsh is now shaping the conversation. Do you think that's factoring in? Lucas: I think it's more about Warsh's actual policy stance than Greenspan's legacy, though the passing of a 100-year-old former chair is a moment to reflect. Greenspan was famous for the 'Greenspan put' — the idea that the Fed would step in to support markets. Warsh has been signaling a different approach. There was a headline calling it 'regime change but in a velvet glove.' The market is still trying to figure out how much of a hawk he really is. Luna: And that uncertainty feeds into the sell-off in dividend stocks. If you're a utility or a REIT, you're sensitive to both rates and growth. But I also wonder about the consumer. China's 618 shopping festival growth slowed sharply — that's a global consumer warning. Lucas: It is. And that connects directly to stocks like Coca-Cola and Procter & Gamble. If the global consumer is pulling back, you have to question whether their earnings can support the dividend growth they've been known for. Coca-Cola has raised its dividend for 62 consecutive years. That streak is not at risk — but the growth rate might slow, and the market hates that more than a cut in some ways. Luna: Right, because a slower growth rate means the stock's multiple compresses. And we're seeing that in the data. SCHD, which is a dividend growth ETF, is down more than VYM, which is a high-yield ETF. That tells me investors are more worried about future growth than current income. Lucas: That's a really sharp observation. Let me check the numbers — yes, SCHD is off 2.3 percent, VYM down 0.7 percent. The high-yield names like Altria are actually holding up — MO is only down 0.1 percent. It's the stocks that are expected to grow their dividends that are getting punished. The market is discounting future increases. Luna: And if that continues, dividend growth investors might need to rethink their strategy. But before we go too deep into that — and this is something I've been meaning to say — if you're finding this conversation useful, the reason we can keep having it without ads is because of listener support. If today helped you think about your portfolio a little differently, you can check out buy me a coffee dot com slash fexingo. Lucas: Yeah, it really does make a difference. Even a small contribution helps us keep the podcast independent and focused on what matters. So thanks to anyone who's already done that. Now, back to the strategy question — what do you think the dividend investor should do right now? Luna: I think it depends on your time horizon. If you're a long-term income seeker, a sell-off like this is actually a buying opportunity, especially in names like Realty Income that have a 30-year track record of raising dividends. But you have to be selective. Lucas: I agree. And I'd add that you need to watch the yield curve. The 10-year minus 2-year spread is 27 basis points — still positive, but narrowing. If it inverts again, that would be a recession signal, and dividend stocks tend to lag in the early stages of a recession before recovering. Luna: So you're saying don't panic, but don't assume the old plays work. Lucas: Exactly. This is a moment to check your holdings against the economic cycle. Staples like PG and JNJ are probably fine — they've been through multiple recessions. But a name like Verizon, which has a ton of debt and a dividend that eats up most of free cash flow — that's one I'd want to see more margin of safety on. Luna: And what about the mid-cap dividend plays? The Russell 2000 is actually up 1.3 percent in the same period. That's a stark contrast. Lucas: That's a great point. Small and mid-cap stocks are rallying because they're more domestically focused and less exposed to global consumer weakness. And they tend to benefit from a Fed that's done hiking. That rotation from mega-cap growth into smaller value is real, and it's one of the few bright spots for dividend investors right now. Luna: So the play might be to look at dividend-paying mid-caps that have been overlooked. But I want to bring us back to the big picture — Alan Greenspan's death at 100 is prompting a lot of retrospectives. How do you think his legacy informs the current moment? Lucas: I think Greenspan's era taught us that central bankers have immense power to shape markets, but also that they can make mistakes — like keeping rates too low for too long in the early 2000s. Kevin Warsh, who was a Fed governor during the financial crisis, is a different breed. He's more rules-based, less willing to intervene. That could mean a higher tolerance for market corrections, which would be bad for dividend stocks that rely on a stable, supportive Fed. Luna: So you're saying the 'Greenspan put' is dead, and dividend investors need to adjust. Lucas: I think it's on life support. The new regime is one where the Fed prioritizes inflation control over market stability. That means dividend stocks may not get bailed out by rate cuts the moment things get rocky. You have to earn your returns through genuine cash flow, not just multiple expansion. Luna: That feels like a healthy discipline, actually. But it's a shift. So what's one concrete thing our listeners can do this week to adjust? Lucas: I'd say look at your dividend holdings and ask: does this company generate enough free cash flow to cover its dividend in a recession? For example, Altria has a high payout ratio, but it's also a cash machine — it's down only 0.1 percent this week. Meanwhile, Verizon's payout ratio is over 90 percent, and the stock is getting hammered. That's the market pricing in risk. Luna: That's a good rule of thumb. And if you want to go deeper, check the dividend history. Companies that have raised dividends through multiple downturns — like Coca-Cola, Johnson & Johnson, Procter & Gamble — those are the ones you want to hold. The ones that didn't raise in 2008 or 2020 may be more vulnerable. Lucas: Exactly. And one more thing — keep an eye on the 10-year yield. If it drops below 4.4 percent, that's a strong recession signal, and you should be ready to rotate into more defensive dividend stocks. If it holds above 4.5 percent, the economy might be okay, and you can stay in your growthier dividend names. Luna: So we're watching the bond market for clues. Good advice. I think we've covered a lot today. Lucas, any final thought? Lucas: Just that this is a moment to be patient. Dividend investing is a marathon, not a sprint. The sell-off we're seeing is real, but it's also creating opportunities for disciplined investors. Stay focused on cash flow, stay diversified, and don't let short-term noise shake you out of good positions. Luna: Well said. Thanks for listening, and we'll be back soon with more.