Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Stocks Falter When Treasuries Hit 4 49 Percent
Transcript
- Lucas: So the ten-year Treasury hit 4.49 percent this week, and the dividend stock sell-off is getting hard to ignore. Look at Johnson & Johnson down five percent in five days, Coca-Cola off three percent, Verizon dropping nearly six percent. Luna: That's a pretty broad hit to the classic income names. And SCHD, the Schwab dividend ETF, is down almost three percent in the same window. Lucas: Right, and that's telling because SCHD is supposed to be the quality dividend play — screened for dividend growth, financial health, the whole framework. But when the risk-free rate is approaching five percent on the long end, even quality income gets repriced. Luna: So the mechanism is straightforward: if I can get 4.5 percent on a ten-year government bond with zero credit risk, why would I take on equity risk for a dividend yield that might be 3.5 or even four percent? Lucas: Exactly. The yield competition is real. But let's be specific about the numbers. Verizon's dividend yield right now is about 5.5 percent — that's still above the ten-year. So why is VZ down 5.7 percent this week? Luna: Maybe the market is pricing in that the dividend isn't sustainable? Or that the yield advantage is narrowing fast enough to spook momentum? Lucas: Both. Verizon's payout ratio is around 50 percent, which is fine, but their revenue growth is basically flat. When bond yields rise, the market re-evaluates the risk premium on equities. A stock like VZ that's basically a bond proxy gets hit hardest because its upside is capped. Luna: And Johnson & Johnson — that's a classic defensive stock, AAA credit rating, decades of dividend increases. But down five percent in a week is a big move for JNJ. Lucas: It is. And it's not just JNJ — look at Procter & Gamble, also down. The consumer staples trade is getting unwound. The logic is that with inflation still above the Fed's target and the ten-year at 4.49, the real yield — after inflation — is finally positive. That's a game changer. Luna: Right, because for years real yields were negative, so stocks with pricing power were the only game in town. Now bonds actually offer a positive real return. Lucas: Exactly. And that's why the rotation is hitting dividend stocks that people thought were safe havens. But here's the nuance: not all dividend stocks are reacting the same. The VYM ETF, which tracks high-dividend yield, is only down 0.7 percent in five days. Luna: So VYM is holding up better than SCHD. That's interesting — VYM has more exposure to utilities and energy, which benefit from higher rates in some cases. Lucas: Right. And SCHD has more consumer staples and healthcare, which are getting squeezed. So the market is discriminating. It's not a blanket sell-off — it's a repricing based on which companies can actually grow their dividends in this environment. Luna: And speaking of the environment — the yield curve is still inverted, but barely. The ten-year minus two-year spread is 27 basis points. That's not screaming recession, but it's not normal either. Lucas: It's a weird middle ground. The Fed held rates steady at 3.63 percent this month, but the market is pricing in a more hawkish path under the new chair. That's pushing long-term yields up even without a rate hike. Luna: So the message for dividend investors is: don't assume safety just because a stock has a long history of payouts. The macro environment can override that history quickly. Lucas: Exactly. And that's actually a good place to mention something that's been on my mind. You know, this show stays ad-free because a small number of listeners chip in each month. If our conversations about yield, risk, and total return have helped you think about your portfolio differently — even just once — it would mean a lot if you'd consider supporting us. Luna: Yeah, it's a simple thing. Buy me a coffee dot com slash fexingo. That's it. And it genuinely keeps us going. Lucas: No pressure, just putting it out there. Back to the sell-off — I think the key question is whether this is a buying opportunity or the start of a deeper rotation. Let's look at the data. Luna: What data point stands out to you? Lucas: The dividend yield on the S&P 500 is about 1.3 percent. That's near historic lows. So even with the ten-year at 4.49, the equity risk premium — earnings yield minus bond yield — is still positive, but it's compressed. Luna: But that's the index. For dividend-focused funds, the yield is higher. SCHD yields around 3.6 percent, VYM about 3.1 percent. So the spread over Treasuries is still there, just thinner. Lucas: Right. And that's why I think this sell-off is more about sentiment and positioning than a fundamental collapse. The companies themselves — JNJ, KO, PG — they're not in trouble. Their dividends are safe. But the price you pay for that income matters. Luna: So if you're a long-term income investor, do you buy the dip? Or do you wait for yields to stabilize? Lucas: I'd say it depends on your time horizon. If you're dripping dividends for the next ten years, a 5 percent pullback in JNJ is noise. But if you're worried about near-term price declines, maybe dollar-cost average into positions. Luna: And what about the mid-cap dividend space? We've talked before about how mid-caps might offer better growth and yield balance. Lucas: That's actually where I'm looking. The S&P 400 mid-cap index yields around 2.2 percent, but the dividend growth rate has been faster than large caps. And mid-caps are less correlated to the bond market because they're less bond proxy ish. Luna: So they might not get hit as hard when Treasuries spike. That's a good diversifier. Lucas: Exactly. And let's not forget — when bonds sell off, it's often because growth expectations are improving. If the economy is actually stronger than priced in, dividend growth stocks could benefit. Luna: That's the bullish case. The bear case is that the ten-year keeps climbing toward 5 percent and dividend stocks get hammered further. Lucas: Right. So I think the prudent approach is to own companies with low payout ratios, strong free cash flow, and a history of raising dividends even in tough times. Those are the ones that will survive a yield shock. Luna: And avoid the ones with high debt and low growth. Sounds like the same advice we've been giving all year. Lucas: It is. But sometimes the market forces us to relearn the same lesson. The ten-year at 4.49 is a reminder that dividends are not bonds, and that price matters. Luna: Well said. Let's see how the next few weeks play out. Lucas: Yeah. We'll keep watching the yield curve and the dividend cuts. Thanks for listening.