Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Stocks Fight the Odds of a Fed Rate Hike
Transcript
- Lucas: So the ten-year yield just ticked up to 4.67 percent as of yesterday, and the chatter about a Fed rate hike is getting louder again. That puts dividend stocks in an interesting spot. Luna: Right, because the argument against dividends when rates rise is basically 'why take equity risk for a 3 percent yield when you can get nearly 5 percent risk-free?' Lucas: Exactly, but the real answer is more nuanced. Look at what happened this week. The S&P 500 dropped about 0.7 percent in the last five days, but VYM, the Vanguard High Dividend Yield ETF, was actually up 0.7 percent. So dividend stocks broadly held in better than the market. Luna: That's a big gap. What about SCHD and DVY? They didn't fare as well. Lucas: SCHD slipped 0.3 percent, DVY fell 0.6 percent. Both underperformed VYM. Now, that could be noise over five days, but it might also reflect sector composition. VYM has a heavier weight in health care and utilities, which tend to be less sensitive to rate moves. SCHD leans more financials, and DVY is big on utilities but also has some real estate. Luna: And real estate got hit. O, Realty Income, dropped 1.5 percent this week. REITs are sensitive to rates because higher yields make their dividends less attractive, plus borrowing costs matter. Lucas: Right. So the blanket statement 'dividends are dead when rates rise' is too simple. It really depends on the sector and the company's ability to grow its payout. Look at Verizon. Its yield is around 5.5 percent, and the stock actually gained 0.5 percent this week. Johnson & Johnson rose 2.5 percent. Investors are still willing to pay for those growing dividends. Luna: Even with the ten-year at 4.67, a 5.5 percent yield from Verizon still offers a spread. But the risk is that if the Fed actually hikes, the yield curve might steepen further, and then bond yields could go even higher. At what point does the spread become too thin? Lucas: That's the million-dollar question. The two-year yield is at 4.31, so the curve is still inverted by about 36 basis points. That inversion has been persistent, and it's historically been a recession signal. If we do get a recession, dividend growers like JNJ and PG tend to hold up better than high-yield names that might cut payouts. Procter & Gamble dropped 2 percent this week, though — no company is immune. Luna: PG's drop might also be about its own earnings or guidance, not just macro. But let's talk about the high-yield names. Altria dropped almost 3 percent this week. That stock is yielding over 8 percent, but the market is pricing in risk. With $100 oil and potential inflation resurgence, tobacco companies face regulatory and volume headwinds. Lucas: Right, and that's a key point. When you buy a high-yield stock, you're often taking on more business risk. The dividend might look safe on paper, but if the company's earnings are under pressure, the payout could be cut. That's why I think the dividend growth approach — focusing on companies that consistently raise their payouts — is more resilient in this environment. Luna: And the data backs that up. The Dividend Aristocrats index has lagged the S&P 500 this year, as we've discussed before, but that's more about growth stocks outperforming. In a risk-off scenario, those aristocrats tend to provide downside protection. Lucas: Exactly. So for listeners wondering whether to stick with dividend stocks or move to bonds, I'd say it's not an either-or. If you need current income, a diversified portfolio of dividend growers with yields between 2 and 4 percent can still offer a decent spread over Treasuries, plus the potential for capital appreciation if rates stabilize. And if the Fed does hike, bonds will take a hit too — so it's not like bonds are risk-free right now. Luna: True. Long-term Treasuries have already lost value as yields rose. The 30-year is at 5.15 now. So locking in a 5 percent yield on a bond might look good, but if rates go higher, your bond price drops. With equities, at least you have the dividend growth to offset some of that. Lucas: Let's talk about one concrete example: Johnson & Johnson. It's up 2.5 percent this week. Its dividend yield is about 3.1 percent, but the company has raised its dividend for 60-plus consecutive years. That track record gives investors confidence that even if rates rise, the payout will keep growing. Luna: And that's the kind of thing that if today's conversation was useful to you, this show stays ad-free because of listener support. If you'd like to help keep these episodes coming, you can buy me a coffee — just visit buy me a coffee dot com slash fexingo. Really helps us keep doing deep dives like this. Lucas: Yeah, we appreciate everyone who chips in. So back to the question: how do you position a dividend portfolio for a potential rate hike? Luna: I'd say focus on quality. Companies with strong balance sheets, consistent earnings, and a history of dividend growth. And be wary of sectors that are rate-sensitive, like utilities and REITs, unless you're getting a significant spread over Treasuries. Lucas: Right. And consider the yield curve. If it stays inverted, that suggests the market expects rates to come down eventually. So locking in high yields now could pay off when rates do fall. But if the curve steepens because of a rate hike, short-term bonds might be a better parking spot. It's a complex environment, but dividend stocks still have a role. Luna: Especially if you reinvest dividends. The compounding effect can smooth out the volatility. Even if the stock price drops, reinvesting at lower prices buys more shares, which increases future income. Lucas: Exactly. So the takeaway is: don't abandon dividends just because bond yields are rising. But do your homework. Look at payout ratios, debt levels, and dividend growth history. Not all dividends are created equal.