Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Dividend Aristocrats Look Cheap in May 2026
Transcript
- Lucas: Luna, I keep coming back to this one number that's been sitting in the back of my mind. Dividend aristocrats — the S&P 500 companies that have raised dividends for at least 25 consecutive years — they're trading at a price to earnings ratio of about 21 times forward earnings right now. That's below their five-year average of around 24 times. Luna: So they're actually getting cheaper while the broader market — the S&P 500 at 7,477 — has been grinding higher. That feels counterintuitive. Lucas: Exactly. The S&P 500 is up about 11% year-to-date through mid-May. But the aristocrats index, which tracks these 65 or so names, is up maybe half that. There's a real divergence happening. Luna: Is the market just rotating away from defensive dividend payers toward growth? Because we've seen that pattern before — when rates are elevated, people chase momentum. Lucas: That's part of it. The ten-year Treasury yield is still above 4.5%, even though it's come down a bit from 4.67% in early May. When bonds yield 4.5% risk-free, a stock yielding 2.5% with some dividend growth potential doesn't look as compelling on the surface. But the thing is, many aristocrats yield more than that now. Luna: Right. Procter & Gamble is yielding about 2.6% at $144 and change. Johnson & Johnson at $234 is yielding over 3%. Verizon, which isn't technically an aristocrat but is in the conversation, is at 3.6% yield on its own. Lucas: And those yields are growing. J&J just raised its dividend in April for the 63rd consecutive year. That's not a typo — 63 years. So you're locking in a 3% starting yield that historically compounds at 5% to 7% annually. Luna: That compounds into a yield on cost that looks very different a decade later. So the question is: is this a buying opportunity, or is the market correctly pricing in slower dividend growth ahead? Lucas: That's the tension. On one hand, the valuation gap is real. The aristocrats' P/E of 21 is about one standard deviation below the five-year average. Historically, buying at these levels has produced above-average total returns over the following three to five years. Luna: But on the other hand, we're in a rate environment we haven't seen in 15 years. The Fed funds rate is still at 3.64%, and the yield curve is still inverted — the 2-year Treasury yields 4.04%, the 10-year yields 4.57%. That's not normal. Lucas: No, it's not. And that inversion has historically been a recession signal. If we do get a slowdown, some of these companies could see earnings pressure, which might slow dividend growth or, in a worst case, freeze a dividend. Luna: But the whole point of aristocrats is that they've navigated recessions before. Procter & Gamble raised its dividend through the 2008 financial crisis. Johnson & Johnson raised through the dot-com bust. Lucas: True. But there's survivorship bias there. The aristocrats list has changed. Companies like ExxonMobil cut during COVID, and it took them a while to get back on the list. So past performance doesn't guarantee future resilience. Luna: Still, for an income investor with a 10- to 20-year horizon, buying a diversified basket of aristocrats at a 10% valuation discount seems like a sensible play. You're not trying to time the bottom. Lucas: You're dollar-cost averaging into quality. And that's really the framework I want to land on. If you look at the Schwab U.S. Dividend Equity ETF, ticker SCHD, it's at $32.83, up 2.5% in the last five days. That ETF tilts toward dividend growth, and its yield is around 3.4%. Luna: Versus the Vanguard High Dividend Yield ETF, VYM, at $158.74, yielding closer to 2.9%. So you have choices depending on whether you want current income or growth. Lucas: And that's where the active decision comes in. If today's episode was useful to you and you want to keep it ad-free, buy me a coffee dot com slash fexingo helps. Luna: Yeah, it really does. Every contribution goes directly into keeping these conversations going. Appreciate it. Lucas: So back to the aristocrats. I think the real insight is that the valuation compression is happening unevenly. Some sectors are cheaper than others. Consumer staples — think Procter & Gamble, Coca-Cola at $81.63 — those are trading at a premium because they're seen as recession-proof. Healthcare, like J&J, is moderately priced. But utilities and telecoms are actually quite depressed. Luna: Verizon at $48.42, up 3.6% in the last five days, but still down from its 52-week high. Its yield is attractive, but the dividend growth rate has slowed. They've raised only about 2% annually recently. Lucas: Right. So you have to differentiate between high yield with low growth — what some call 'yield traps' — and moderate yield with high growth. An aristocrat like Lowe's, for example, has raised its dividend at a compound annual growth rate of over 15% for the last decade. Luna: That's the kind of compounding that builds wealth. A 2% starting yield growing at 15% doubles your income every five years. Lucas: Exactly. So for listeners building a dividend portfolio in May 2026, the playbook might be: look for aristocrats trading below their historical P/E, with a dividend growth rate above 8%, and a payout ratio under 60%. That gives you a margin of safety. Luna: And avoid the temptation to reach for yield. Just because a stock yields 5% doesn't mean it's a better buy than a 2.5% yielder with strong growth prospects. The total return over time favors growth. Lucas: One more data point that I find encouraging: the iShares Select Dividend ETF, DVY, is at $155.82, up 2.2% in five days. That ETF focuses on high dividend yields, but it's also rallied recently. It tells me income investors are starting to come back into the space. Luna: Maybe the market is beginning to price in a peak in rates. The 10-year Treasury has fallen about 10 basis points in the last couple of weeks. If that trend continues, dividend stocks could see a rotation back in their favor. Lucas: That's the macro bet. But even without that, if you buy a diversified group of aristocrats at 21 times earnings and hold for a decade, history says you'll do fine. Not every year will be great, but the dividend income grows, and the capital appreciation tends to follow. Luna: So the takeaway for someone listening: the aristocrats are on sale relative to their own history. That doesn't mean they can't get cheaper, but for a long-term income investor, this is a compelling entry point. Lucas: And the key is to build the portfolio methodically. Not all at once, but over the next few months. Because the macro environment is uncertain, but the quality of these businesses is not. That's the bet. Luna: Good place to leave it. Thanks, Lucas. Lucas: Thanks, Luna. See you next time.