Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Dividend Stocks vs Rising Bond Yields in July 2026
Transcript
- Lucas: If you've been watching the ten-year Treasury yield lately, you saw it tick up to 4.48 percent as of July first. That's up from 4.44 just a week earlier, and it's the highest we've seen in months. Luna: Right, and every time bonds yield more, the classic question comes up: why own dividend stocks when you can get a safe 4.5 percent from the government? Lucas: Exactly. And it's a fair question, but the answer isn't as simple as 'dividends lose.' In fact, over the past week, VYM — the Vanguard High Dividend Yield ETF — is up 0.8 percent. SCHD is up 0.9 percent. DVY, the iShares Select Dividend ETF, up 0.6 percent. Luna: So they're actually holding up okay, even with bond yields rising. But we've seen some big divergences underneath the surface. Lucas: Huge divergences. Take Verizon — VZ is down 8.6 percent in the last five days. That's a brutal drop for a stock yielding over 5 percent. Meanwhile, Coke, yielding less than 3 percent, is up 1.8 percent. Johnson and Johnson, yielding around 3 percent, up 3.3 percent. Luna: So the market is punishing some high yielders while rewarding lower yielders with stronger growth profiles. That sounds like a 'quality' trade. Lucas: It is. And it's tied to something called duration — the sensitivity of a stock's price to changes in interest rates. Companies with stable, growing dividends that are less cyclical have lower duration. They behave more like short-term bonds. Luna: And Verizon, with its high debt load and stagnant dividend growth, probably has much higher duration. So when rates rise, its present value gets hit harder. Lucas: Exactly. And that's the key insight: not all dividend stocks react the same way to rising yields. The ones with strong dividend growth — like Coke, which has raised its dividend for 63 consecutive years — actually benefit from the narrative of stability. Lucas: We also saw Realty Income, ticker O, up 1.6 percent this week. That's a triple-net lease REIT, which usually gets crushed when yields rise. But O is up because the market is pricing in that its lease escalations and dividend growth can keep pace with inflation. Luna: So even within the same sector, the market is differentiating. It's not a blanket selloff in dividend stocks. It's a rotation into quality. Lucas: If today was actually useful to you, the way these stay ad-free is listener support. Buy me a coffee dot com slash fexingo. That kind of thing really helps us keep going. Luna: Yeah, and we really appreciate it. Every bit keeps the show independent and focused on what matters. Lucas: So back to the yield curve. The spread between the ten-year and two-year has widened to 35 basis points, up from 31. That's a steeper curve, which historically favors banks and financials, but it also tells us the market expects either stronger growth or higher inflation. Luna: And that expectation is what's driving the rotation. If growth is going to be solid, then companies with pricing power — like Coke, Procter and Gamble, Johnson and Johnson — can keep growing dividends. Lucas: Exactly. And if inflation stays sticky, those companies can pass through costs. Verizon, on the other hand, has a harder time raising prices. Its revenue is more regulated, more competitive. Luna: So for investors building a dividend portfolio today, what's the takeaway? Should they avoid high yielders altogether? Lucas: No, I don't think so. But I'd say they need to look at the payout ratio and the history of dividend growth. If a company is paying out 90 percent of earnings and barely growing, that's a red flag. But if it's paying 50 percent and growing 6 percent a year, that's a different story. Lucas: We can look at SCHD, the Schwab U.S. Dividend Equity ETF. It's up 0.9 percent this week. That fund screens for dividend growth and quality, not just yield. So it's naturally tilted toward the kind of stocks that are holding up. Luna: And VYM, which tracks high dividend yield, is also up, but by a slightly smaller margin. So the growth factor is giving a bit of a buffer. Lucas: Right. And then there's DVY, which focuses on high dividend but also screens for some quality metrics. It's up 0.6 percent. So all three are positive, but the spread matters. Luna: I think a lot of listeners might be tempted to just buy the ten-year and call it a day. But the yield on that bond is nominal. After inflation, the real yield might be 1.5 to 2 percent. A good dividend growth stock can give you that plus growth. Lucas: That's the key point. Over time, dividend growth compounds. A bond's coupon is fixed. So if you're investing for income over the next ten years, a portfolio of growing dividends can actually outperform bonds even if yields rise further. Lucas: Let's put some numbers on it. Johnson and Johnson currently yields about 3 percent. If they grow the dividend at 5 percent per year, in ten years that yield on cost is nearly 5 percent. And the stock price likely appreciates too. Luna: Whereas the ten-year bond, if you buy it today at 4.48 percent, you get that same coupon for ten years. No growth. And if you reinvest, you're at the mercy of future rates. Lucas: Exactly. So the debate isn't really 'bonds versus stocks.' It's 'which stocks can deliver the growth to outrun rising rates.' And right now, the market is rewarding those that can. Luna: We should also mention that the Russell 2000, the small-cap index, is down 0.5 percent this week. So small-cap dividend stocks are struggling more. Lucas: That's a good point. Small caps tend to have more variable earnings and higher debt loads. They're more rate-sensitive. So the big, high-quality dividend payers are the ones leading. Luna: So for listeners who want to invest in dividend stocks right now, what's a simple framework? Maybe three things to check? Lucas: Sure. First, look at payout ratio — I'd say under 60 percent is safer. Second, check the dividend growth rate over the last five years. Third, look at the company's debt to equity ratio. Lower is better. Lucas: If you screen for those three, you'll end up with names like Coke, Johnson and Johnson, Procter and Gamble — all of which are up this week. Luna: And avoid the ones that are yielding 6 percent but have flat or declining dividends. That's a trap. Lucas: Classic value trap. So in this environment, it's not about reaching for yield. It's about reaching for sustainable yield growth. Luna: We saw Altria, ticker MO, down 1.5 percent this week. That's a high yielder, but its business is in structural decline. The dividend might be safe for now, but the growth story is weak. Lucas: And the market is pricing that in. Over the last five days, Altria lost while the broad market gained. So investors are making a choice. Lucas: I think the bottom line is: don't fear rising bond yields if you own the right dividend stocks. The ten-year at 4.48 percent is a headwind for some, but a tailwind for differentiation. Quality wins. Luna: And that's a message worth repeating. Thanks, Lucas.