Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Dividend Stocks Win When Interest Rates Stay Put
Transcript
- Lucas: So we are nearing the end of May 2026, and one number has caught my eye — the Fed Funds rate has been essentially flat at 3.64 percent since the beginning of April. Luna: That's nearly two months without a move. And the market seems fine with it? Lucas: More than fine. The S&P 500 is up 1.6 percent in the last five days alone, and the Nasdaq is up over 2.4 percent. But I want to focus on what this flat rate environment means for dividend investors specifically. Luna: Because when rates stop rising, the narrative shifts. Suddenly bonds aren't the only game in town. Lucas: Exactly. Look at the 10-year Treasury — it's yielding 4.50 percent. That's still attractive relative to the last decade. But compare that to a quality dividend payer like Procter & Gamble. PG is yielding around 2.3 percent right now, but its dividend has grown at a compound annual growth rate of about 6 percent over the last 10 years. Luna: So the bond gives you a fixed 4.5 percent, and PG gives you a lower starting yield but that income grows over time. Lucas: Right. And in a flat rate environment, the reinvestment risk for bonds is real. If you buy a 10-year Treasury at 4.5 percent and rates stay flat, you're locked in. But if rates eventually fall, you miss the capital gains. With a dividend grower, you get both income growth and potential price appreciation. Luna: And we're seeing that play out. VYM, the Vanguard High Dividend Yield ETF, is up 0.7 percent in the last five days. SCHD, the Schwab U.S. Dividend Equity ETF, is up 1.1 percent. Lucas: Those are solid moves for income-focused funds. And they're outperforming some of the high-yield names. Altria, for instance, is yielding over 8 percent but it's down 2.4 percent in the same period. The market is rewarding quality over raw yield right now. Luna: So the message is: don't chase the highest yield just because bonds are paying more. Lucas: Exactly. And that's where the dividend growth strategy shines. Johnson & Johnson, for example, has increased its dividend for 60 consecutive years. It's yielding about 3.1 percent right now, and its stock is up 0.2 percent in the last five days — not flashy, but steady. In a flat rate world, steady wins the race. Luna: And what about the yield curve? The 10-year minus 2-year spread is at 48 basis points, down slightly from 49. That's still positive — it steepened earlier this year. Lucas: That's a key point. A steepening yield curve is typically good for financial stocks, which often pay dividends. But it also signals that the market expects growth — which benefits companies that can grow their dividends. So the environment is actually quite favorable for dividend growth stocks. Luna: Now, one thing we should mention — we're able to dive into these topics every day because of listeners who support the show. A handful of folks chip in monthly through Buy Me a Coffee at buymeacoffee.com/fexingo, and that honest truth is what funds making this many episodes possible. No ads, just listener support. Lucas: Yeah, it's a small group, but it keeps the lights on. And we're grateful for every one of them. If our money conversations have helped you think about a decision differently, that's the same link — buymeacoffee.com/fexingo. Luna: Alright, back to the data. So with rates flat, dividend growers are winning. But what about the high-yield names that are getting punished? Lucas: That's the key nuance. Not all dividends are created equal. The market is differentiating between sustainable dividend growth and unsustainable high yields. Verizon is yielding over 6 percent, but it's down 0.5 percent in the last five days. The market is worried about its debt load and capital spending needs. Luna: So the message is: look for companies with strong free cash flow and a history of raising dividends, not just a high current yield. Lucas: Precisely. And that's why ETFs like SCHD have been performing well. SCHD screens for dividend growth, quality, and financial strength — not just yield. It's up 1.1 percent in the last five days, which is solid. Luna: And VYM, which tracks high dividend yield but with a quality tilt, is also up. So there's a place for both, but the emphasis should be on sustainability. Lucas: Right. Now, one more data point — the 30-year Treasury is yielding 5.03 percent. That's the highest in years. But even that bond has reinvestment risk. If you're an income investor with a long time horizon, a portfolio of dividend growers can potentially outpace that yield over time. Luna: And with the Fed on hold, the clock is ticking for bond investors to lock in yields. But for dividend investors, the opportunity is ongoing. Lucas: Exactly. So the takeaway for May 2026: don't let the 4.5 percent Treasury yield distract you. Dividend growth stocks offer a compelling alternative, especially if you have a multi-year horizon. Companies like PG, JNJ, and even Coke — which is down slightly this week but has a 60-plus year dividend growth streak — are worth a closer look. Luna: And if you're using ETFs, SCHD and VYM are good proxies. But always check the holdings to make sure they align with your goals. Lucas: Great point. Next time we'll dig into one specific dividend grower and do a full analysis. Until then, keep an eye on those yield curve moves.