Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Investors Should Read a Steepening Yield Curve
Transcript
- Lucas: So the ten-year Treasury is at 4.66 percent, the two-year at 4.19. That spread has widened to about forty-seven basis points — the steepest it's been in years. And for anyone living off dividends, that's a bigger deal than most people think. Luna: Because a steepening curve usually means the market is pricing in stronger growth or higher inflation down the road. But how does that trickle down to, say, a Coca-Cola dividend? Lucas: Right. Coke is down about two percent over the past five days, and it's yielding somewhere around three percent. But the real issue is that when long-term yields climb, the present value of future dividends drops. So the stock price takes a hit even though the dividend itself is safe. Luna: So you're saying the dividend yield goes up because the price falls, but the investor isn't actually better off. Lucas: Exactly. And that's the trap. A lot of investors see a higher yield and think they're getting more income, but total return is what matters. If the price is falling faster than the dividend grows, you're losing ground. That's why we've seen VYM and SCHD — the big dividend ETFs — down half a percent to nearly a percent over the past week while the S&P is up. Luna: So the market is rewarding growth over income right now. But is that always the case with a steepening curve, or is there something specific about this cycle? Lucas: Historically, steepening curves have favored cyclicals and financials — banks especially, because they borrow short and lend long. But this time, the curve is steepening from a place where the Fed has been holding rates steady at around 3.63 percent. The two-year is actually anchored, while the long end is drifting up. That's a different signal. Luna: So what does that mean for a dividend investor who's used to just buying the aristocrats and holding forever? Lucas: It means you have to think about duration. Johnson & Johnson, Procter & Gamble, Coca-Cola — these are long-duration assets. Their dividends grow slowly, but the cash flows are far in the future. When long-term rates rise, those future cash flows get discounted more heavily. So the stocks lag. That's exactly what we're seeing — J&J down one point two percent, Procter down one point one percent over the week. Luna: But they're still great companies. You're not saying sell them, right? Lucas: Not at all. But there's a difference between a great company and a great investment at a given price. If the curve keeps steepening, the opportunity cost of holding a low-yield aristocrat goes up. A ten-year Treasury at 4.66 percent is now paying more than the dividend yield on a lot of these names. So the question becomes: are you getting paid enough to take on equity risk? Luna: That's a fair question. And it's why we've seen some investors rotate into higher-yielding, shorter-duration names like Verizon or even Altria. Verizon is flat this week, but Altria is up two and a half percent. Is that the play? Lucas: I think it's part of it. Altria yields around eight percent, and it's a cash machine. But it also has regulatory risk and a declining volume story. Verizon's yield is around six and a half percent, which is more than the ten-year. So on a relative basis, that income looks more attractive. But you still have to watch the payout ratio — Verizon's is above fifty percent, which is manageable, but it's not growing fast. Luna: So the real question is whether you're being compensated for the risk. And in a steepening curve, maybe the answer is to look at sectors that have been left behind, like financials or energy. Lucas: Exactly. Banks are interesting because higher long-term rates can improve net interest margins. And energy companies have been paying down debt and increasing dividends. But you have to be selective. The point isn't to abandon your dividend strategy — it's to understand that the yield curve is telling you something about how the market is pricing future growth, and you should adjust your portfolio accordingly. Luna: So if someone has a portfolio of classic dividend aristocrats, what's a practical step they can take this week? Lucas: First, look at the duration of your portfolio. If you're heavily weighted in low-yield, high-growth dividend payers, consider trimming some of that and adding higher-yield, lower-duration names — but don't just chase yield. Look at payout ratios and free cash flow. Second, check your total return, not just your yield. If your stocks are falling faster than your dividends grow, you're not actually building wealth. Luna: And maybe set aside some cash to buy on dips, because if the curve keeps steepening, there could be better entry points. Lucas: That's a smart move. We've seen the ten-year tick up from 4.64 to 4.66 this week — it's not a huge move, but the trend is there. And with the Fed chairman speaking at Jackson Hole tomorrow, there could be more volatility. So having a plan is better than reacting. Luna: Speaking of plans, we should mention something that keeps our show going. We're ad-free, and that's because of listeners who support us with a couple of dollars a month. If you've gotten value from these conversations, you can help at buy me a coffee dot com slash fexingo. Lucas: Yeah, no pressure, but it genuinely makes a difference. Even a small monthly contribution helps us keep doing the research and putting out episodes like this one. Luna: And we really appreciate it. Now, back to the curve — one more thing that surprises people is that a steepening curve can also be a signal for dividend growth stocks, not just high yielders. Lucas: Right. Companies that consistently raise their dividends, like the dividend aristocrats, actually tend to outperform over the long run, even in a rising rate environment. Because their earnings growth can offset the discounting effect. So it's not about dumping them — it's about being patient and focusing on the growth rate. Luna: But the market doesn't always see it that way in the short term, as we've seen this week. Lucas: No, it doesn't. And that's the opportunity. If you believe in the long-term power of dividend growth, a steepening curve is a chance to accumulate those names at a discount. The key is to have a timeframe that matches your thesis. Luna: So what's one concrete takeaway you'd want listeners to remember from this episode? Lucas: Don't confuse yield with return. In a steepening curve, your dividend stocks might look more attractive on yield, but the total return is what pays your bills. Keep an eye on duration, payout ratios, and the opportunity cost of holding equities versus bonds. Luna: And if you're unsure, start by looking at the yield on the ten-year Treasury. If it's higher than your portfolio's yield, that's a conversation worth having with yourself. Lucas: That's a good rule of thumb. Thanks for listening, and we'll catch you next time.