Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Investors Profit From Yield Curve Normalization
Transcript
- Lucas: The yield curve is no longer inverted. It's been a gradual shift, but as of July 12, 2026, the 10-year Treasury sits at 4.54%, the 2-year at 4.16%, and that spread of 35 basis points is positive for the first sustained stretch since early 2023. Luna: Which changes the calculus for dividend investors pretty significantly, right? For years the mantra was 'stocks for income because bonds yield nothing.' Now bonds actually compete. Lucas: Exactly. But I think the conventional wisdom oversimplifies it. A lot of investors hear '10-year at 4.54%' and think, why own a stock yielding 4% when I can get a risk-free 4.54%? But that misses the nuance of total return versus current income. Luna: And dividend growth. A bond's coupon is fixed. A stock's dividend can grow. That's the whole thesis behind the Dividend Aristocrats. Lucas: Right. So let's look at a concrete example. Realty Income — ticker O — trades at $63.31 as of this morning, with a dividend yield around 5.3%. That's actually higher than the 30-year Treasury at 5.05%. But the 30-year locks in that yield for three decades. Realty Income's dividend has grown at a compound annual growth rate of about 4.5% over the last decade. Luna: So an investor who buys O today gets a starting yield of 5.3%, and that income stream grows over time. The bond doesn't grow. But the bond also doesn't have the volatility of a REIT. Lucas: That's the trade-off. But here's the thing — when the yield curve normalizes like this, it often signals that the economy is on more solid footing. That's good for companies that can raise dividends. Look at the dividend ETFs: VYM at $161.06, SCHD at $32.40, DVY at $159.46 — all up about half a percent over the last five days, even as the Dow slipped. Luna: And the S&P 500 is at 7,575, up half a percent. So dividend stocks are keeping pace. That's not nothing when bonds are offering real competition. Lucas: The real opportunity, I think, is for investors who've been sitting in cash or short-term Treasuries earning around 3.83% on the 3-month bill. That yield is coming down as the Fed holds rates flat. The Fed Funds rate is at 3.62% — effectively flat since June. So rolling short-term paper is getting less attractive. Luna: Which pushes people further out the curve or into equities for yield. And that's where dividend stocks with pricing power — like Coke at $83.49, up six-tenths — become compelling. Lucas: Coke's a great example. It yields about 3.1% right now. That's below the 10-year. But Coke grows its dividend every year, and it's a defensive stock. In a yield curve normalization, the steepener trade — long bonds, short equities — has worked historically. But for income investors who need cash flow, swapping Coke for a 10-year note means giving up dividend growth. Luna: And if inflation reaccelerates, that fixed bond payment loses purchasing power. Dividends tend to keep up because companies raise prices. Lucas: Exactly. So I'd argue that the yield curve normalization actually favors dividend growth stocks over high-yield bonds right now, provided the investor has a time horizon of five years or more. The risk is if we get a recession — then bonds outperform. But the curve is positively sloped, which historically suggests expansion, not contraction. Luna: What about the high-yield bond market? High yield bonds yield maybe 7% or 8% now. That's competitive with many dividend stocks. Lucas: They are, but high yield bonds have equity-like risk with capped upside. A dividend stock like Procter & Gamble at $147.04 — down one and a half percent over five days, so it's having a rough week — but its dividend yield is about 2.4%. That's low, but the dividend has been raised for 65 consecutive years. That consistency has value. Luna: Especially if you're dollar-cost averaging. The dip in PG this week could actually be a buying opportunity for dividend growth investors. Lucas: I agree. And this gets to the core of what we're talking about — the yield curve normalization doesn't invalidate dividend investing. It just raises the bar. You need to be more selective. ETFs like SCHD, which screens for dividend growth and quality, are designed for exactly this environment. Luna: So if a listener is building a dividend portfolio today, what's the one thing they should do differently compared to a year ago? Lucas: I'd say: don't reach for yield. In an inverted curve environment, you could get decent income from short-term bonds without much risk. Now that the curve is normalizing, the temptation is to chase the highest dividend yields — but those often come with the most risk. Look at Verizon at $42.12, up one point eight percent in five days. It yields about 6.5%. That's attractive, but Verizon's debt load is high, and dividend growth has slowed. Luna: So quality over yield. That's been a consistent theme. But with the 10-year at 4.54%, the bar for 'quality' is higher. Lucas: Exactly. A stock that yields 3% but grows its dividend at 8% a year will outperform a stock that yields 5% with no growth over a ten-year horizon. The math is straightforward. Luna: And that's the kind of concrete takeaway people can actually use. If this episode helped clarify how the yield curve shift affects your income strategy, I'd just say — the way we keep these conversations ad-free and independent is listener support. If you found it useful, you can buy me a coffee at buy me a coffee dot com slash fexingo. It genuinely helps. Lucas: Yeah, appreciate that. And it's really what keeps us digging into these specific case studies rather than just doing broad market commentary. Luna: Alright, back to it. So Lucas, you mentioned the math on dividend growth. Can you walk through a quick example with real numbers? Lucas: Sure. Take Johnson & Johnson. It closed at $256.98, down nine-tenths over five days, so it's having a slight pullback. It yields roughly 3.1%. If J&J grows its dividend at 5% annually — conservative for them — in ten years, your yield on cost is over 5%. That income stream is now higher than what you'd get from a 10-year Treasury bought today. And you still own the stock, which may have appreciated. Luna: And the bond? You get the same coupon forever, and at maturity you get your principal back. But in ten years, that coupon buys less if inflation averages 2.5%. Lucas: Right. So the bond is a better hedge against deflation or recession. The dividend growth stock is a better hedge against inflation and growth. The yield curve normalization doesn't change that fundamental distinction. It just makes the bond side more competitive than it was. Luna: Final thought — for someone with a mixed portfolio, does the yield curve normalization argue for a tilt toward value or growth in the equity portion? Lucas: I think it argues for quality. The Russell 2000 is down one point one percent over five days, at 2,978. Small caps are struggling. The mega-cap NASDAQ is up six-tenths. So the market is rewarding companies with strong balance sheets and consistent cash flows. That's the same universe dividend growth investors look at. So if you're already in SCHD or VYM, you're likely well-positioned. Luna: And if you're not, maybe now is the time to start. Not because the curve is normalizing, but because the underlying economic signal is supportive. Lucas: Exactly. The curve normalization is a confirmation, not a catalyst. The catalyst is the dividend growth itself.