Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / The 30-Year Yield Is 5.19 Percent What Dividend Investors Should Do
Transcript
- Lucas: So Luna, let me start with a number that's been gnawing at me all week: the 30-year Treasury is now yielding 5.19 percent. That's up from 5.18 just yesterday, and it's the highest we've seen in years. Luna: Five point one nine on the long bond. That changes the conversation for anyone living off dividends, doesn't it? Lucas: It really does. For the past decade, the argument for dividend stocks was simple: bonds gave you nothing, so you had to take equity risk to get income. At 5.19 percent, the risk-free alternative is suddenly competitive with a lot of high-yield dividend payers. Luna: But it's not just the 30-year. The 10-year is at 4.67, and the spread between the 2- and 10-year has narrowed to about 39 basis points. What does that tell us? Lucas: It tells us the market is pricing in a flatter curve, but with a very steep long end. The 30-year is 52 basis points above the 10-year. That's a big premium for duration risk. And for dividend investors, it means the competition is real. Luna: So how do you compare, say, Coca-Cola at a 2.8 percent yield against a 30-year at 5.19? That's a huge gap. Lucas: Right, and that's the crux. Coca-Cola's dividend yield, based on that recent price around 89.66, is roughly 2.8 percent. The 30-year gives you 5.19 percent risk-free. But the mistake is looking at starting yield alone. You have to think about total return, dividend growth, and the durability of that income stream. Luna: So you're saying the bond looks better on day one, but over a decade, the dividend grower might win? Lucas: Exactly. Coca-Cola has grown its dividend for over 60 years. Historically, that growth has averaged around 5 to 6 percent a year. So even if you start at 2.8 percent, your yield on cost compounds. Meanwhile, the 30-year bond pays you 5.19 percent every year, but your coupon stays flat. After ten years, a stock like Coke is likely paying you more, and you also have the potential for price appreciation. Luna: But there's risk in that equity. The bond is guaranteed if you hold to maturity. How do you weigh that? Lucas: That's the honest trade-off. The bond gives you certainty of nominal income, but you're locking in a nominal yield that might not keep up with inflation. The stock gives you a growing income stream, but with volatility and the risk of a dividend cut. Look at what happened to Verizon recently – the stock is down 1.9 percent over the past five days, and its yield is now over 6.5 percent. That high yield is a red flag for some investors. Luna: Verizon at 50.10, down 1.9 percent this week. That's a classic bond proxy that's getting hit as rates rise. But is the dividend safe? Lucas: Verizon's payout ratio is around 50 percent of earnings, so it's covered. But the market is worried about their debt load and competition. The point is, a high yield can be a trap if the underlying business is deteriorating. That's why we always tell listeners to look at payout ratio and free cash flow, not just yield. Luna: So what about a name like Altria? It's up 0.3 percent this week, yield around 8 percent. Is that a warning sign too? Lucas: Altria is a different beast. They have a very high payout ratio – over 80 percent of earnings – and they're dealing with declining volumes in cigarettes. That's a situation where the dividend might be safe for now, but the growth is limited. In a 5.19 percent world, you have to ask: am I being compensated enough for that risk? Luna: So you're saying the bar is higher now. A 4 percent yield used to be attractive. Now you need 5 or 6 percent to justify the equity risk. Lucas: That's exactly the shift. And it's why we're seeing dividend stocks underperform the broader market this week. The S&P 500 is up 0.8 percent over five days, but VYM, the high-dividend ETF, is down 0.5 percent. SCHD is down 0.9 percent. That divergence is the market repricing income stocks. Luna: So should dividend investors just sell everything and buy long bonds? That seems too simple. Lucas: No, definitely not. Because you're also giving up the potential for capital gains. If the Fed cuts rates next year – and remember, September is a coin flip right now – bond prices will rally, but so will dividend stocks. And the total return picture changes. Let me give you a concrete example. Luna: I'm all ears. Lucas: Take Johnson & Johnson, trading around 268. Yield is about 3 percent. Suppose you buy it and hold for ten years. Even if the stock price just tracks earnings growth at, say, 4 percent a year, and the dividend grows at 5 percent, your yield on cost after a decade is around 4.9 percent. And you've also got capital appreciation. The 30-year bond gives you 5.19 percent, but your real return depends on inflation. If inflation averages 2.5 percent, you're getting maybe 2.7 percent real. J&J's dividend growth plus price appreciation could easily beat that. Luna: But not without volatility. We've seen J&J drop 1.3 percent this week. That would scare off someone who needs steady income. Lucas: Absolutely, and that's where the decision gets personal. If you're 70 and living off your portfolio, a 5.19 percent risk-free yield is incredibly tempting. But if you're 40 and still accumulating, you want growth. The key is to know your own time horizon and income needs. Luna: And what about the steepening curve? The 10-year minus 2-year spread is only 39 basis points, but the 30-year is 5.19. That suggests the market expects long-term inflation or term premium to rise. Does that help certain dividend sectors? Lucas: It helps financials. Banks borrow short and lend long, so a steeper curve is good for their net interest margins. That's why we've seen some regional banks outperform this year. But for utilities and real estate, it's a headwind. Realty Income, for example, is down 1.9 percent this week, and it's a bond proxy with a 5.8 percent yield. The rising long end makes their properties less attractive relative to bonds. Luna: So maybe the play is to tilt toward financials and away from utilities and real estate? Lucas: That's a reasonable shift, but you have to be selective. Not all banks are created equal, and some have credit risk. The broader point is that dividend investing isn't a one-size-fits-all strategy. You have to adapt to the rate environment. In a flat rate world, quality growth matters. In a steepening world, you can afford to be more aggressive with cyclical income. Luna: Speaking of adapting, I know we're running short on time, but I want to touch on something we've been meaning to mention. Lucas, you and I have been doing this show for over 170 episodes now, and it's completely listener-supported. No ads, no sponsors. The only reason we can keep going is that a small group of listeners chips in a few dollars a month through buy me a coffee dot com slash fexingo. Lucas: Yeah, it's not a big ask. It's just a way for anyone who finds these conversations useful to help cover the costs of research and production. We're not trying to sell anything, and we never will. But if you've gotten value from the show, that link is there. And it genuinely makes a difference. Luna: Absolutely. And we're not going to belabor it. Let's get back to the numbers, because there's one more thing I want to ask you about. Lucas: Sure, what's on your mind? Luna: The Fed. The effective rate is still at 3.63 percent, but the market is now pricing a real chance of a hike in September. How should dividend investors position for that? Lucas: If the Fed hikes, that's going to push short-term yields up, which could make money market funds even more attractive. Right now, you can get around 3.6 percent in a money market, which is not bad for zero risk. But for dividend investors, I'd say don't overreact. A quarter-point hike isn't going to change the long-term picture. What matters more is the long end, and that's already moved. Luna: So you're saying, keep your dividend stocks, but be aware of the competition from bonds? Lucas: Exactly. And that means being more demanding. If a stock yields less than the 10-year Treasury, you need to believe in strong dividend growth and capital appreciation. Otherwise, why take the risk? That's why I'm starting to favor stocks with a proven track record of raising dividends, like Procter & Gamble, even if the yield is only 2.4 percent. Their growth is what compounds over time. Luna: So the message for our listeners is: don't panic, but do your math. Compare your dividend yield plus growth rate to the 30-year, and make sure you're being compensated for risk. Lucas: That's the takeaway. The 5.19 percent 30-year is a wake-up call, not a death knell for dividend investing. It's a reminder that income investing is about total return, not just yield. And if you're a long-term investor, a little patience can still pay off. Luna: Well said. Thanks for breaking it down, Lucas. And to our listeners, if you found this helpful, maybe consider supporting the show. It's what keeps us going. Lucas: And who knows, maybe we'll do another 170 episodes. We'll see you next time.