Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Dividend Aristocrats Lag the S&P 500 in 2026
Transcript
- Lucas: So we're about halfway through 2026, and one of the quieter stories in the market is how badly the Dividend Aristocrats index is trailing the S&P 500. We're talking the S&P 500 Dividend Aristocrats — the companies that have raised dividends for at least 25 consecutive years — down roughly 2 percent year-to-date, while the broader S&P 500 is up about 8 percent. Luna: That's a double-digit gap in performance. And from what I've seen, it's not just this year — the Aristocrats have been lagging for a while. Lucas: Right, the trend actually started in late 2023. But what's notable now is that the 10-year Treasury yield is at 4.63 percent. For the first time in over a decade, you can get a risk-free 4.6 percent from a bond. That changes the calculus for anyone who was buying stocks primarily for income. Luna: Exactly. If you're a retiree or an income-focused investor, why take on equity risk for a 2.5 percent dividend yield when a Treasury bond pays almost double that? Lucas: And that's the crux of it. The average yield of the Dividend Aristocrats index is around 2.5 percent. Even the highest yielders in the index — like Verizon at 6.4 percent or 3M at around 5 percent — are exceptions. Most of the names are low-growth, high-quality consumer staples and healthcare companies that simply can't compete with bonds on yield. Luna: Let's look at two examples from this week. Procter & Gamble is down 1.6 percent in the past five days, trading at around $149. Johnson & Johnson, on the other hand, is up 2.3 percent to about $256. What's driving that divergence? Lucas: J&J is a good case study because it has a bit of a growth narrative around its pharmaceutical and medtech segments. PG is more of a pure consumer staples play — slow revenue growth, high margins, but no catalyst. In a market that's chasing AI and tech, PG looks stale. J&J at least has some pipeline stories. Luna: So the market is punishing the 'boring but reliable' dividend growers and rewarding companies that can show some kind of growth vector? Lucas: Exactly. And that's a problem for the Aristocrats thesis. The whole point of owning these stocks is that they provide steady income and modest capital appreciation over time. But when the risk-free rate is 4.6 percent, modest appreciation isn't enough. You need to either accept lower total returns or look elsewhere. Luna: One of the arguments I've heard is that dividend growth itself is a form of return. A company that raises its dividend by 7 percent a year will eventually have a yield on cost that beats bonds. But that takes time. Lucas: It does. And the market is notoriously impatient. If you bought PG five years ago, your yield on cost might be 3.5 percent now. That's still less than the 10-year Treasury. And you've taken on equity risk to get there. Luna: This is exactly the kind of conversation that reminds me why we keep the show ad-free. If you're finding these comparisons useful — thinking about your own portfolio differently — that's the whole point. And the way these stay ad-free is listener support: buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a small gesture that keeps us independent. And we appreciate everyone who's chipped in. Anyway — back to the Aristocrats. So if you're an income investor in 2026, you have three options: hold the Aristocrats and hope for a rotation back into quality, rotate into higher-yielding sectors like utilities or REITs, or accept that your capital appreciation will have to come from growth stocks and treat dividends as a secondary concern. Luna: What about the argument that dividend growth stocks are actually cheaper now? If they're underperforming, maybe it's a buying opportunity. Lucas: That's a classic value argument. But the risk is that the underperformance continues until the Fed cuts rates significantly. If the 10-year stays above 4.5 percent, bonds remain a viable alternative. Historically, dividend stocks have outperformed when rates are falling, not when they're flat or rising. Luna: And the Fed funds rate is at 3.63 percent, which is flat. The yield curve is still inverted — the 10-year is 4.63 and the 2-year is 4.26, so the spread is about 36 basis points. That's not screaming 'rate cuts anytime soon.' Lucas: Exactly. The market is pricing in maybe one cut by the end of the year. But even if we get a quarter-point cut, the 10-year might not fall below 4.3 percent. That's still competitive with the dividend yield of most Aristocrats. Luna: So what would you tell a listener who has a portfolio that's 60 percent in dividend aristocrats and is watching it lag the market? Lucas: I'd say don't panic sell. But do a stress test. If the 10-year goes to 5 percent — which is possible given the 30-year is already at 5.13 — how much more could your stocks fall? For a stock like PG, the dividend yield would need to rise to compete, which means the stock price would have to drop. A 5 percent yield on PG would imply a stock price of about $120, which is 20 percent lower than today. Luna: That's a sobering thought. But you could also argue that the market has already priced in some of that risk, since PG is down 1.6 percent this week alone. Lucas: True. But the trend is your friend until it isn't. I think the key for income investors is to diversify across asset classes. Don't just own dividend stocks. Consider adding some bonds, maybe a REIT like Realty Income, which yields about 5.7 percent, or even a covered-call ETF that generates income from options. Luna: Realty Income is actually down 1.1 percent in the past five days, so even that's not immune. But the yield is there. Lucas: Right. No stock is immune when rates are high. But the point is to have multiple sources of income so you're not reliant on any one sector or strategy. Luna: Let's zoom out a bit. The entire market is up this year thanks to a handful of mega-cap tech stocks. The S&P 500 is at 7,499, the Dow is at 52,219, and the Nasdaq is at 25,691. But the average stock — especially the dividend payer — is not participating. Lucas: That's the bifurcation we've been talking about for months. The top 10 stocks in the S&P 500 account for about 35 percent of the index's weight. Most of those are tech companies that pay little to no dividends. So if you're a dividend investor, you're essentially underweight the part of the market that's working. Luna: And overweight the parts that are struggling. That's a tough place to be. Lucas: It is. But I think there's a long-term case for Aristocrats. They've been through countless rate cycles and have come out ahead eventually. The question is whether you have the patience to wait it out. Luna: Patience is a luxury when you need income now. For retirees who depend on dividends, a 2.5 percent yield might not cover expenses if inflation is still running at 3 percent or so. Lucas: That's the real risk: negative real returns. If your dividend yield is 2.5 percent and inflation is 3 percent, you're losing purchasing power. That's why some investors are turning to higher-yielding sectors like energy or financials, where yields can be 4 to 5 percent. Luna: But those sectors come with more volatility. Energy stocks are sensitive to oil prices, which have been all over the place. Lucas: Exactly. There's no free lunch. Every higher yield comes with higher risk. The trick is to match your risk tolerance with your income needs. Luna: So for the average listener, what's one concrete takeaway from this episode? Lucas: I'd say: don't assume that dividend aristocrats are a safe haven in this environment. They're not — not when bonds offer similar yields with less risk. If you own them, understand why you own them. If it's for income, consider whether a bond ladder or a diversified income ETF might serve you better today. Luna: And if you're still building your portfolio, maybe look at dividend growth as a long-term play, but be prepared for short-term pain while rates are high. Lucas: Exactly. Dividends are a marathon, not a sprint. But in a race where bonds are running alongside you, you need to know which shoes to wear.