Latest / Stock Picking with Fexingo: Individual Equities, Research, and Building a Concentrated Portfolio / The Case for Dividend Growth Stocks Amid Tech Turmoil
Transcript
- Lucas: So the Nasdaq is down over four percent in the last five days. Microsoft fell nearly seven percent. Nvidia dropped over six. And yet, a handful of boring old dividend-paying stocks are barely budging. Luna: I noticed that too. The value ETFs like IWD and VTV are only down about one percent or less. It feels like a textbook rotation. Lucas: Exactly. And I think it's worth looking at one specific corner of value that often gets overlooked in growth-obsessed markets: dividend growth stocks. Not just high yield, but companies that consistently raise their payouts. Luna: You mean the Dividend Aristocrats — those that have increased dividends for 25-plus years? Lucas: Right. But I want to zoom in on one: Procter & Gamble. Fifty million shares? No, I mean, it's a classic. PG has raised its dividend for 68 consecutive years. That's longer than most of us have been alive. Luna: And what's the appeal now, specifically? Because its yield is only around two and a half percent. Lucas: That's the thing — yield today is less important than the trajectory. If you bought PG ten years ago, your yield on cost today is probably over four percent because they've been raising the payout around four to five percent annually. In a world where ten-year Treasuries are yielding maybe four and a half, that compounding matters. Luna: So you're saying the total return from dividend growth stocks can compete with tech, but with way less volatility? Lucas: Over long periods, yes. A study by Ned Davis Research showed that dividend growers outperformed non-dividend payers by about two percent annually over the last 40 years. And during drawdowns, they fall less. So during this tech correction, stocks like PG, Coca-Cola, Johnson & Johnson — they're acting as shock absorbers. Luna: I can see that. But isn't there a risk that if rates stay higher for longer, these stocks get crushed too? I mean, the dividend yield is competing with risk-free yield. Lucas: Fair point. But the key is that dividend growers have pricing power. PG can raise prices on Tide and Pampers because consumers need them. So their earnings and dividends grow even when the economy slows. That's different from a bond, which has fixed payments. Luna: So you see this as a core holding in a concentrated portfolio? Lucas: Absolutely. I'd argue that for an individual investor building a concentrated portfolio of 15 to 20 stocks, you want three or four dividend growth names as anchors. They reduce the urge to panic-sell when growth stocks get cut in half. Luna: Right. But what about valuation? PG trades at about 24 times earnings. That's not cheap. Lucas: It's not dirt cheap, but it's in line with its five-year average. And the payout ratio is around 60 percent, which leaves room for continued growth. Compare that to some tech stocks trading at 30-plus times earnings with no dividends and negative free cash flow. Luna: So the argument is more about risk-adjusted returns than raw upside. Lucas: Exactly. And in this environment, where the Fed is on hold — Chair Warsh just reiterated that the hot jobs report keeps rate cuts distant — the certainty of a growing dividend becomes more valuable. Luna: I can see that. For a listener with a ten-year horizon, buying a name like PG today could lock in a growing income stream. Lucas: That's the idea. And you don't need to overthink it. You just hold it and reinvest the dividends. Over time, the yield on cost does the heavy lifting. Luna: It's almost a set-and-forget strategy. Lucas: Pretty much. And you know, if our conversations about money and investing have helped you think about your portfolio a little differently, there's a simple way to support the show and keep it ad-free. Luna: Sure — just head to buy me a coffee dot com slash fexingo. Lucas: Honestly, if today's episode was worth a coffee, that's the link. No pressure, no perks — just a way to keep us independent. Luna: Yeah. And now, back to the numbers. Lucas, you mentioned the payout ratio of 60 percent. What's a healthy range for a dividend growth stock? Lucas: Good question. I generally like payout ratios between 40 and 70 percent. Below 40, the company might be hoarding cash without returning it. Above 70, the dividend might be at risk if earnings dip. PG at 60 is in the sweet spot. Luna: And what about sectors? Are there other names besides consumer staples that fit? Lucas: Industrial names like Caterpillar have strong dividend growth records. So do some healthcare companies like UnitedHealth. But they're more cyclical. For a true anchor, I prefer the steady eddies: staples, utilities, and select healthcare. Luna: So for someone building a concentrated portfolio right now, would you start with a dividend grower? Lucas: I would. In this market, with tech under pressure and rates uncertain, starting with a stock that pays you to wait is a smart move. You get income, lower volatility, and long-term compounding. That's a hard combination to beat. Luna: Alright, I'm going to look at my own portfolio this weekend. Thanks, Lucas. Lucas: Happy to dig into it. Next time, we'll talk about how to size these positions in a concentrated portfolio. Until then, keep picking.