Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / The Real Cost of Dividend Drag in 2026
Transcript
- Lucas: If our money conversations have helped you think about a decision differently, consider supporting the show directly. A handful of listeners chip in monthly through buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. — and that's literally what funds making this many of these ad-free episodes. Luna: Yeah, it keeps the research deep and the ads out, which I know a lot of you appreciate. Thanks for helping us keep the lights on. Lucas: Let’s talk about something that sounds good on paper but often fails in practice: the illusion of safety in high-dividend yields. We’re sitting here in early November 2026, looking at the S&P 500 down 1.3 percent over the last five days, while individual names like Altria are up 6 percent and Verizon is up nearly 4 percent. It’s tempting to look at those percentage gains as validation for holding onto tired, high-yield stories. Luna: But aren’t those moves just mean reversion after recent sell-offs? Or is there a structural reason investors are piling back into telecom and tobacco? Lucas: It’s partly mean reversion, sure. But the deeper issue is what we call dividend drag. When a company pays out a large portion of its earnings as dividends, it has less capital to reinvest in growth, innovation, or debt reduction. Over time, this leads to capital depreciation. The stock price falls because the business isn’t expanding, so the only return you get is the cash check. If that check doesn’t grow faster than inflation, you’re losing purchasing power. Luna: So even if the yield is high, if the share price drops enough, your total return could be negative compared to a broader index like the VYM fund. Lucas: Exactly. Look at the numbers. The Vanguard High Yield Dividend ETF is trading around 163 dollars and 74 cents, up slightly over the week. Meanwhile, Altria hit 78 dollars and 3 cents, and Verizon is at 44 dollars and 73 cents. Verizon’s yield is historically high, often above 6 percent. But if that stock was 50 dollars two years ago and is now 44 dollars, you’ve lost 12 percent in capital value. To make up for that with a 6 percent yield, you’d need to hold it for nearly two years just to break even against a zero-return scenario, let alone beat an index. Luna: That’s a brutal math problem. Most people just see the 6 percent coupon and ignore the shrinking principal. How do we teach listeners to spot this before they buy? Lucas: You have to look at the payout ratio and the free cash flow trend. In 2026, with the Fed Funds rate holding steady around 3.75 percent, borrowing costs remain elevated for companies with weak balance sheets. If a firm is paying out more than 80 percent of its earnings as dividends, it’s likely cutting corners elsewhere. For Verizon, we’ve seen them lean heavily on debt to fund operations and payouts. That works until credit spreads widen or investor sentiment shifts. Luna: And right now, with the ten-year Treasury yield at 4.98 percent, those bonds are becoming very competitive alternatives to risky dividend stocks. Lucas: Precisely. When you can get a near-5 percent return from a risk-free government bond, why would you take on the operational risks of a declining industry like traditional tobacco or legacy telecom? The spread between safe yields and risky dividend yields has compressed significantly. Investors are demanding a much higher premium for taking on equity risk in these sectors, which pushes prices down further. Luna: So the 'safe' income play is actually the most dangerous one in this environment. What about companies that pay lower yields but grow them consistently? Lucas: That’s where the real alpha hides. Look at Johnson & Johnson or Procter & Gamble. They trade at higher valuations, yes, but they have decades of consistent earnings growth. Their yields might be 2.5 to 3 percent, but their stock prices have appreciated alongside their dividend hikes. Over a ten-year period, that compounding effect dwarfs the static income of a high-yielder that hasn’t raised its dividend in five years. Luna: I’ve seen clients stick with high-yielders because they feel 'rich' seeing big deposit checks every quarter. It’s behavioral, not mathematical. Lucas: It’s absolutely behavioral. It’s the availability heuristic. You see the cash, you feel the income, and you ignore the invisible erosion of your principal. We need to shift the mindset from 'how much cash do I get now' to 'what is my total wealth trajectory in ten years?' If your portfolio generates 2 percent total return per year while inflation is 3 percent, you are slowly going broke, regardless of how nice the quarterly deposits look. Luna: That’s a hard pill to swallow for anyone relying on investment income for living expenses. How do they rebalance without panic? Lucas: They start by auditing their holdings. If a stock has a yield above 5 percent but hasn’t grown its dividend in three years, it’s a red flag. Cut it. Replace it with a quality compounder that pays a modest yield but has a clear path to growth. Use tools like the SCHD ETF, which focuses on fundamental strength rather than just yield screening. It’s currently up 1.4 percent over the week, reflecting investor preference for quality over cheapness. Luna: Quality over cheapness. That’s the mantra. But doesn’t that mean accepting lower current income? Lucas: It means accepting lower yield for higher income. A 2 percent yield that grows at 7 percent annually will eventually surpass a static 6 percent yield within a decade. The key is patience and discipline. Most investors lack both when faced with the temptation of immediate cash flow. Luna: Right. And in a rising rate environment, that patience is tested even more. People want liquidity and safety. Lucas: Which brings us back to the macro data. With the 3-month Treasury yielding 4.18 percent and the 10-year at 4.98 percent, cash equivalents are offering decent protection. But they don’t offer growth. The sweet spot is a balanced portfolio: some high-quality dividend growers for inflation protection, and some short-term treasuries for liquidity. Don’t chase yield in junk assets. Luna: So avoid the traps like Verizon and Altria unless you have a specific thesis that their turnaround is imminent? Lucas: Unless you have a specific thesis, yes. And even then, size those positions small. The general rule should be: never hold a stock solely for its yield if the underlying business is in structural decline. Check the free cash flow conversion, check the debt maturity wall, and check the dividend history. If any of those are shaky, move on. Luna: Shaky free cash flow is the silent killer. A company can pay dividends for years and still be burning cash. It’s unsustainable. Lucas: Exactly. And once the market realizes that, the dividend gets cut, and the stock crashes. We saw that with Telecom in previous episodes, and we’ll see it again in other sectors. The lesson is simple: prioritize capital preservation and growth over immediate income distribution. Luna: It changes the entire way you look at your portfolio. Instead of a basket of checks, it becomes a machine for generating future wealth. Lucas: Yes. And that machine needs maintenance. Review your holdings quarterly. Ask yourself: 'Is this company better off today than it was five years ago?' If the answer is no, it doesn’t matter how high the yield is. Get out. Luna: A powerful filter. Simple, but hard to execute emotionally. Do you have any final thoughts on how listeners can start this audit? Lucas: Start with your top five holdings. Look up their dividend growth streaks. If the streak is broken or stagnating, investigate why. If you can’t find a compelling reason to stay, sell. Reinvest into a diversified quality fund or a few strong individual compounders. It’s boring work, but it builds real wealth. Luna: Boring is profitable. Thank you, Lucas. Let’s keep digging into the data next week. Lucas: Agreed. Until then, watch your total returns, not just your yield. And remember, the best dividend is one that grows while your principal appreciates. Luna: Thanks for listening. See you next time. Lucas: Wait, Luna, before we go, did you check the latest CPI print? It might affect our view on the Fed's next move. Luna: Not yet, but I’ll pull it up. The 3.90 percent interest on reserves is holding steady, though. Lucas: Right, that’s the floor. So inflation expectations must be anchored somewhere near that. Interesting. Luna: Yeah, it suggests the market thinks the Fed is done hiking for now. Let’s discuss that in the next episode. Lucas: Deal. Keep your eyes on the fundamentals, everyone. That’s all for today. Luna: Bye!