Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Low Volatility Dividend Stocks Shine When Rates Rise
Transcript
- Lucas: The ten-year Treasury yield touched 4.55 percent this week, up from 4.48 just a few days ago. And if you’re a dividend investor, that kind of move usually sends you scanning for which stocks are going to hold up. Luna: Right, because the old logic is that when bond yields rise, dividend stocks become less attractive. But this time around, I’m seeing some interesting divergence. Lucas: Exactly. The knee-jerk reaction is to worry about high-yield names—utilities, REITs, telecoms. But if you look at the five-day numbers as of July 8th, a couple of popular dividend ETFs tell a different story. SCHD, the Schwab U.S. Dividend Equity ETF, is up 1.5 percent. DVY, the iShares Select Dividend ETF, is up 0.7 percent. Both positive while the S&P 500 is essentially flat. Luna: So the market isn’t punishing all dividend payers equally. What’s different about the ones in those ETFs? Lucas: The common thread is lower volatility and a focus on dividend growth, not just yield. SCHD, for instance, screens for companies that have increased dividends for at least ten consecutive years and have a sustainable payout ratio. That tends to mean more exposure to consumer staples, healthcare, and industrials—sectors with pricing power. DVY has a value tilt and includes financials and energy, which can actually benefit from a rising rate environment. Luna: And the high-yield names that get hit hardest are often the ones with high debt and low growth. Verizon, for example, yields north of 5 percent, but it’s only up about 1 percent this week. Meanwhile, Realty Income—ticker O—is up over 2 percent this week alone. Lucas: Realty Income is a fascinating case. It’s a REIT, so it’s required to pay out most of its income as dividends. And with the ten-year up to 4.55, you’d think REITs would get crushed. But O has a triple-net lease model with long-term contracts and built-in rent escalators. That inflation protection matters when rates rise because it suggests the dividend can keep growing. Plus, O’s tenants are mostly service and retail businesses that aren’t as cyclical. Luna: So the lesson here isn’t ‘avoid dividends when rates rise.’ It’s ‘be selective about which dividends you own.’ Lucas: Exactly. And that’s where low-volatility dividend strategies come in. There’s an ETF called USMV, the iShares MSCI USA Min Vol Factor ETF, which isn’t a pure dividend play but includes a lot of dividend payers. It’s up about 0.8 percent this week. The idea is that stocks with steady earnings and lower price swings—like Procter & Gamble or Johnson & Johnson—tend to hold up better when the rate environment shifts because their cash flows are predictable. Luna: And we’ve actually seen JNJ up 3.7 percent over the past five days. That’s a standout. What’s driving that? Lucas: Part of it is the defensive bid—investors rotating out of high-growth tech into stable earnings. JNJ has a aaa rated balance sheet, a dividend yield around 3 percent, and a 60-plus-year streak of increases. When the ten-year is moving up, that kind of reliability gets a premium. The same goes for Coca-Cola, up 2.6 percent this week. These are stocks with low beta relative to the market. Luna: So if I’m building a portfolio right now, should I focus on low-volatility dividend ETFs or pick individual names like JNJ and KO? Lucas: I think there’s room for both. ETFs give you diversification and lower single-stock risk. SCHD has an expense ratio of 0.06 percent—basically free. DVY is a bit pricier at 0.39 percent, but it’s designed to capture high dividends with a value screen. If you want to overweight specific sectors that do well when rates rise, like financials, you might complement that with a dividend growth ETF that has heavier consumer staples exposure. Luna: And what about the bond market itself? With the two-year yield at 4.19 percent, the yield curve is still relatively flat—the spread between the two-year and ten-year is only 36 basis points. Does that change the calculus? Lucas: It does. A flat curve often signals that the market expects slower growth ahead. In that environment, companies with strong cash flows and low debt—the kind that fund dividends—tend to outperform. The Fed minutes released today showed officials were split on the direction of rates, so there’s uncertainty. Low-volatility dividend stocks can act as a buffer against that uncertainty because their valuations are less dependent on future growth assumptions. Luna: So the takeaway is that as long as the yield curve stays relatively flat and rates are moving up gradually, low-volatility dividend stocks might actually be a sweet spot. Lucas: Right. And one more thing—Realty Income is a good example of a stock that benefits from a different mechanism. As a REIT, its dividend yield is tied to its property income. When rates rise, new properties get financed at higher rates, but O’s existing portfolio has leases with annual rent increases. So the dividend can grow over time. That’s why it’s up 2.3 percent this week even with the ten-year at 4.55. Luna: It’s almost counterintuitive. But I think the core insight is that not all dividends are created equal—and the market is rewarding the ones with staying power. Lucas: Before we wrap that thread, I want to circle back to something that’s been on my mind. We talk a lot on this show about making smart decisions with your money, and that’s exactly why we keep doing these episodes ad-free. Luna: Yeah, it’s something we hear from listeners a lot—that these conversations actually help them think about their portfolios differently. And that’s what keeps us going. Lucas: If you’ve gotten value out of the show, a couple of dollars a month is genuinely what keeps these going. You can head to buy me a coffee dot com slash fexingo—all lowercase—if you want to support the work. It really does make a difference. Luna: Totally. And we mean it—every bit helps us keep the show independent. So, with that, let’s get back to the numbers. You mentioned financials as a sector that can benefit from rising rates. Which dividend stocks in that space are worth watching? Lucas: JPMorgan, for instance, has a dividend yield around 2.5 percent and a payout ratio under 30 percent. When rates rise, net interest margins expand, which boosts earnings. That gives them room to keep raising the dividend. Goldman Sachs is similar. But I’d focus on the ones with diversified revenue streams, not just pure lending. Luna: And what about the risk that higher rates could slow the economy and hurt loan demand? That’s the flip side. Lucas: That’s a real risk, and it’s why you want low-volatility exposure even within financials. Money-center banks with big trading and asset management arms are less dependent on loan growth. Also, with the yield curve still flat, banks that rely on short-term borrowing to fund long-term loans get squeezed. So you want lenders with stable deposit bases, like regional banks with strong local franchises. Luna: So the theme of this episode really is: in a rising rate environment, prioritize dividend reliability over yield. And low-volatility ETFs are a simple way to implement that. Lucas: Exactly. SCHD and DVY are good starting points. And if you want to add some REIT exposure, Realty Income is the gold standard for low-volatility dividends. Just remember that no single approach works forever—but right now, the data suggests the market is rewarding patience and quality. Luna: And that’s a good note to end on. Thanks for listening—we’ll be back with more next time. Lucas: Take care, everyone.