Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Dividend Stocks That Raised Payouts After the Fed Stress Test
Transcript
- Lucas: So the Federal Reserve released its annual stress test results yesterday, June 24, and the headline is that the biggest U.S. banks can collectively absorb over 700 billion dollars in losses without failing. But what caught my eye wasn't just the pass rate — it's what the banks did the very next day. Luna: You're talking about JPMorgan and Goldman, right? Lucas: Exactly. JPMorgan Chase announced a 50-billion-dollar stock buyback, and Goldman Sachs raised its dividend. This is a huge signal for dividend investors. For the last couple of years, bank dividends have been constrained by higher capital requirements and uncertainty around Basel III endgame rules. The stress test gives the Fed's implicit approval to return more capital to shareholders. Luna: So the stress test essentially greenlights dividend hikes and buybacks. But how much did Goldman actually raise its dividend by? Lucas: Goldman didn't give the exact new dividend per share number in the press release, but analysts are expecting an increase of around 10 to 15 percent from the current quarterly payout of $3.00 per share. That would put the yield comfortably above 2.5 percent, which for Goldman is significant — they've traditionally been more of a growth story than an income stock. Luna: And JPMorgan's buyback is enormous. Fifty billion dollars is roughly 10 percent of their market cap. That's a massive capital return program. Lucas: Right. And the interesting part is that this comes at a time when the broader market is a bit wobbly. The S&P 500 is down 0.8 percent over the past five days, and the NASDAQ is off 2.1 percent. But the Dow, which is heavy on financials, is up 0.7 percent. Banks are acting as a defensive-ish play right now. Luna: That's a shift. Usually, when rates are high, banks benefit from wider net interest margins, but the yield curve has been inverted or flat for a long time. Now it's steepening — the 10-year minus 2-year spread is at 30 basis points, up from 24 basis points a couple of weeks ago. Lucas: A steepening yield curve is generally positive for banks because they borrow short-term and lend long-term. So this stress test result, combined with a more favorable rate backdrop, is a double tailwind. For dividend investors, it means bank stocks could be a source of both income and capital appreciation. Luna: But let's talk about the other side of the dividend world — the stalwarts like Realty Income and Altria. They've had very different moves this week. Lucas: Yeah, Realty Income, ticker O, is up 2.3 percent in the past five days. That's interesting because REITs have been under pressure with the 10-year Treasury yield at 4.5 percent. But O's yield is now around 5.3 percent, so it's still competitive. The market seems to be pricing in that rates have peaked, or at least that the Fed is done hiking. Luna: And Altria, MO, is up 4.5 percent in the same period. That's a big move for a tobacco stock. Their yield is around 8 percent, which is eye-popping, but you have to ask — is the dividend sustainable? Lucas: Altria's payout ratio is over 80 percent, so there's not much room for error. But they've been managing their debt and their smoke-free transition. The big catalyst this week might be that the market is rotating into defensive, high-yield names as growth stocks sell off. The Russell 2000 is up 2.4 percent, so small caps are catching a bid too. Luna: So the rotation is into value and small caps, and dividend stocks are part of that. But within dividend ETFs, we're seeing a divergence. DVY, the iShares Select Dividend ETF, is up 1.4 percent, but VYM, the High Dividend Yield ETF, is down 0.1 percent. What's driving that? Lucas: DVY focuses on mid-cap and larger companies with a consistent dividend history, and it's overweight utilities and financials. VYM is more mega-cap heavy, with a lot of consumer staples and health care. The utilities in DVY have been rallying as rates stabilize, and the financials are getting the stress test boost. VYM has Procter & Gamble and Johnson & Johnson, which are up modestly — PG up 1 percent, JNJ up 2.9 percent — but not enough to offset the drag from, say, Verizon, which is down 0.3 percent. Luna: Verizon's yield is over 5 percent, but the stock has been a laggard. That's the classic trap — chasing yield without looking at total return. Lucas: Exactly. And that's the core lesson for dividend investors right now. The stress test results remind us that dividend growth and capital return policies matter more than the static yield. JPMorgan's buyback is effectively a way to boost earnings per share, which supports future dividend growth. Goldman's dividend hike is a signal that management is confident in their capital position. Luna: So if you're building a dividend portfolio today, are you better off with bank stocks, or sticking with the traditional dividend aristocrats like Coca-Cola and Johnson & Johnson? Lucas: I think you need both, but the weighting depends on your time horizon. Coke, ticker KO, is up 0.8 percent this week, yield about 3.1 percent. JNJ up 2.9 percent, yield about 3.2 percent. These are steady compounders. But banks offer a higher growth rate in dividends right now because they're coming off a low base. The stress test gives them a clear runway for the next year. Luna: And the Fed's own data shows the effective federal funds rate is 3.63 percent, down just a hair from last month. So rates aren't coming down in a hurry, but they're not going up either. That stability is actually good for dividend stocks, because it reduces uncertainty. Lucas: Right. The 10-year Treasury yield dipped to 4.5 percent from 4.51. That's a tiny move, but the direction matters. If bond yields start to fall, dividend stocks become more attractive by comparison. And the steepening yield curve is a positive for financials and the overall economy. Luna: One more thing — the stress test also mentioned that banks can withstand over 700 billion in losses. That's a huge number, but it's actually down from last year's hypothetical loss scenario, which was over 800 billion. So the Fed is reducing the severity of the stress scenario, which implies they think the banking system is healthier. Lucas: That's a subtle but important point. The Fed is basically saying, 'We don't need to test you against as extreme a scenario because the system is more resilient.' That should boost investor confidence in bank dividends across the board. Not just JPMorgan and Goldman, but also regional banks that might announce hikes in the coming weeks. Luna: You know, it's conversations like this that make me realize how much there is to learn about dividend investing. And if our discussions have helped you think about your own portfolio differently, we'd love your support. It keeps the show ad-free and independent. Lucas: Yeah, listener support really does make a difference. If you're able and so inclined, you can buy us a coffee at buy me a coffee dot com slash fexingo. No pressure, genuinely — but it helps us keep digging into these topics. Luna: And it allows us to stay focused on the data and the strategy, without any sponsored messaging. So back to the stress test fallout — what's your next move as a dividend investor? Lucas: I'd be looking at the regional banks that passed the stress test and have strong capital ratios. Some of them yield 4 to 5 percent already, and they could announce dividend increases in the next few weeks. Names like US Bancorp or PNC Financial — they're not as flashy as JPMorgan, but they have solid dividend histories. Luna: And keep an eye on the mid-cap dividend ETFs like DVY, which already have exposure to those names. Also, SCHD is flat this week but has a lower yield around 3.5 percent with better dividend growth. That's a good core holding. Lucas: The key takeaway for this episode is that the stress test results have created a clear catalyst for bank dividends, and the steepening yield curve supports financials. But don't ignore the traditional dividend aristocrats — they provide stability. Balance is everything. Luna: And as always, we'll keep watching the data. Next week we'll look at how the second-quarter earnings season is shaping up for dividend payers. Lucas: Sounds good. Until then, keep your dividends growing.