Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Stocks Survive a 4.40 Percent Ten-Year Treasury
Transcript
- Lucas: The ten-year Treasury yield is at 4.40 percent this morning, down a basis point from yesterday but still within striking distance of the highs we saw earlier this month. For dividend investors, that number is the single most important competing force in the market right now. Luna: And it's been hovering around that level for weeks. So the question is: how do dividend stocks hold up when a risk-free bond is paying 4.4 percent? Lucas: Exactly. And the answer depends entirely on which dividend stocks you're talking about. We're seeing a real divergence this week. Take Realty Income, ticker O — up 4.2 percent in the last five days. That's a REIT yielding about 5.7 percent, so it still offers a spread over Treasuries. Meanwhile, Johnson & Johnson, ticker J-N-J, is up 10.1 percent in the same period, and it only yields about 3.7 percent. Luna: So JNJ is rallying more despite a lower yield. That seems counterintuitive if you're just chasing yield. Lucas: Right. But the market isn't just comparing yields. It's comparing risk. JNJ is a defensive dividend grower with a triple-A credit rating and decades of dividend increases. Investors are paying up for safety and growth potential. Realty Income is also high quality, but REITs are more sensitive to interest rates because they carry more debt and their payout is tied to rent collections, which can fluctuate. Luna: So the 4.4 percent Treasury is acting like a filter. Stocks that can justify their yield with strong fundamentals are winning, while those that just offer a high number are getting scrutinized. Lucas: Precisely. And you see that in the sector ETFs. The iShares Select Dividend ETF, ticker D-V-Y, is up 2.6 percent in five days. It holds a mix of utilities, consumer staples, and financials. Meanwhile, the Vanguard High Dividend Yield ETF, V-Y-M, is flat to slightly down. VYM has more exposure to sectors like energy and real estate that are under more pressure. Luna: Let's talk about the yield curve, because that's also shifting. The ten-year minus two-year spread is only 31 basis points. That's a pretty flat curve. Lucas: Yes, and a flat curve historically signals uncertainty about growth. When the curve is flat, banks and financials tend to struggle because they borrow short and lend long. But for dividend stocks, it means income investors may prefer shorter-duration bonds or stocks with less interest rate sensitivity. That favors the JNJs of the world over longer-duration REITs. Luna: And yet Realty Income is up this week. So maybe the market is pricing in that the Fed is near the end of its hiking cycle. Minneapolis Fed President Kashkari said on Friday he expects a rate hike this year, but the effective Fed funds rate is already at 3.63 percent and hasn't moved. Lucas: Exactly. The market is skeptical that the Fed will actually hike again. The 2-year yield, which is more sensitive to Fed policy, has actually dipped to 4.09 percent. So bond traders are betting the Fed is done. That's good for dividend stocks because it means the competition from Treasuries might not get much worse. Luna: So where does that leave an income investor who's looking at the S&P 500, which is down 1.6 percent in five days, and seeing dividend stocks like KO and VZ and MO all up? Lucas: It suggests a flight to quality. Coca-Cola is up 3.9 percent, Verizon up 2.6 percent, Altria up 6.2 percent. These are all high-yield, defensive names. But I'd caution against reaching for yield without looking at the payout ratio and debt levels. Altria's yield is around 8 percent, but it's facing regulatory headwinds. Verizon has a lot of debt. The market is rewarding them now, but the real winners are companies with pricing power and low leverage — like JNJ, which has a payout ratio under 50 percent. Luna: Speaking of that, our conversations about making smarter income decisions are exactly why listener support matters. If you've found these dividend breakdowns useful, you can buy us a coffee at buy me a coffee dot com slash fexingo. It helps us keep the show ad-free and focused on the numbers. Lucas: Yeah, we appreciate that. And it keeps us independent. So back to the yield curve — the 30-year Treasury is at 4.86 percent, flat. That's still attractive for long-term bond investors, but for dividend stock investors, the key takeaway is that the curve is telling us the economy is slowing. Dividend growers with strong balance sheets are likely to continue outperforming. Luna: And what about the small-cap index? The Russell 2000 is up 0.2 percent, barely moving. That's a sign that investors are not confident in the broader economy. Lucas: Right. The Russell is flat, the Nasdaq is down over 3 percent, while the Dow is up 0.3 percent. That's a classic defensive rotation out of tech and into value and dividends. So the dividend trade is alive and well, but it's selective. You have to own the right names. Luna: And we'll keep following those names. Next episode, we'll look at one specific sector that's benefiting from the flattening curve. Lucas: Utilities, maybe? That's been a quiet winner. But we'll save that for next time.