Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Stocks Benefit From a Flattening Yield Curve
Transcript
- Lucas: The yield curve has flattened to just 31 basis points between the 2-year and the 10-year. That's the tightest spread we've seen in months, and for dividend investors, it actually opens up an interesting play. Luna: Because when long-term yields fall, suddenly that 4 or 5 percent dividend yield looks a lot more competitive relative to bonds, right? Lucas: Exactly. The 10-year Treasury is down to 4.40 percent as of this week, while the 2-year is at 4.09. So you're getting only 31 basis points more for locking up your money for a decade. That's not a great risk premium for bondholders. Luna: But for equity income seekers, it means the relative appeal of dividend stocks goes up, especially for the names with consistent payout growth. Lucas: Let's look at Johnson & Johnson. It yields around 3.2 percent right now, but it's raised its dividend for 63 consecutive years. So you're getting a yield that's not far off the 10-year, plus the growth potential. And with J&J trading at about $255, it's not exactly cheap, but the stability is the draw. Luna: And Realty Income, the monthly dividend REIT, is yielding about 5 percent now. That's a full 60 basis points above the 10-year. That spread has widened as O's price has pulled back. Lucas: Right, O is around $63.12. So you're getting a 5 percent yield from a triple-net lease REIT that pays monthly. In a flat yield curve environment, that kind of income starts to look like a bond substitute with upside. Luna: But isn't there a risk that if rates spike again, these stocks get hit hard? We saw that narrative play out last year. Lucas: Absolutely, and that's the flip side. But right now, the market is pricing in a rate cut later this year, not a hike. Minneapolis Fed President Kashkari said he expects a hike, but the futures market disagrees. The Fed funds rate is at 3.63, and the market sees it potentially lower by year-end. Luna: So if the yield curve stays flat or even inverts further, dividend stocks could keep outperforming. That's the bet. Lucas: Yeah, and we've already seen it in some sectors. The utilities have been quietly grinding higher. Consumer staples too. Procter & Gamble, yielding about 2.4 percent, is up modestly. Even Verizon, with its 6.8 percent yield, has held steady around $46.50. Luna: That's a huge yield. But Verizon's dividend is less safe than J&J's, right? Their debt load is higher. Lucas: Right. You have to differentiate between sustainable yield and yield traps. Verizon's payout ratio is over 50 percent, but free cash flow covers it. Still, I'd rather own J&J or even Altria at 7.8 percent, but that's a whole different risk profile with litigation. Luna: Let's talk about what the Fed stress test results mean. The Fed just released them, and banks passed comfortably. Several announced dividend hikes. That's another tailwind for dividend investors. Lucas: Yeah, JPMorgan, Bank of America, Wells Fargo — all raised their dividends. That's billions of dollars flowing back to shareholders. The financial sector now yields over 2.5 percent on average, and with higher payout ratios, that could increase. Luna: So if you're looking for income, you've got three pillars: stable dividend growers like J&J, high-yield REITs like O, and now banks that are returning more capital. All benefiting from a flatter yield curve in different ways. Lucas: Exactly. And the key is to not just chase yield. You want companies with pricing power, low debt, and a history of raising dividends. In a flat yield curve, those are the ones that attract the bond-substitution trade. Luna: Speaking of sustainable income — if our money conversations have helped you think about a dividend decision differently, we want to keep these episodes free and accessible. A couple of dollars a month is genuinely what keeps these going — buy me a coffee dot com slash fexingo, if you've gotten something out of them. Lucas: Yeah, that's the only reason we can stay ad-free. No pressure, but it makes a real difference. Luna: So back to the curve — what about the international dividend stocks? Are there opportunities outside the U.S.? Lucas: There's a growing case for that. Some European utilities yield over 5 percent with better growth profiles. But the currency risk is real. If the dollar weakens, that's a tailwind, but it's an added layer of complexity. Luna: I think for most dividend investors, keeping it simple with U.S. aristocrats and select REITs is the way to go. Especially now, when the 10-year is offering so little extra for the duration risk. Lucas: Agreed. The bottom line: a 31-basis-point spread means bonds aren't paying you to take term risk. Dividend stocks with solid fundamentals can fill that income gap — just be selective.