Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Coca-Cola Dividends Surge While Altria Falls
Transcript
- Lucas: Okay, so you look at the five-day returns on some of the biggest dividend stocks, and you see a split that's almost hard to believe. Coca-Cola is up seven and a half percent. Altria is down nearly seven percent. Luna: Yeah, that's a massive divergence in the same week. The S&P is basically flat, up 0.3%, so this is all stock-specific. Lucas: Exactly. And it's not like the market's ignoring dividends — it's just being very choosy. Quick honest thing: a handful of listeners chip in monthly through buy me a coffee dot com slash fexingo, and that's literally what funds us making this many of these. No ads, no sponsors. So if you find this kind of analysis useful, that's how it stays going. Luna: Absolutely. It's what keeps the podcast independent. Anyway, back to Coke and Altria — what's driving that gap? Lucas: Well, the obvious starting point is the business trajectory. Coca-Cola has pricing power, a global footprint, and it's generating massive free cash flow. Altria is fighting a secular decline in smoking, facing potential flavor bans, and carrying a lot of debt. Luna: Right, but they're both considered defensive dividend stocks. The yield curve just steepened — the ten-year hit 4.67%, up from 4.61% last week — so shouldn't that hurt both of them? Lucas: In theory, rising long-term yields make dividend stocks less attractive relative to bonds. But the market is differentiating based on the quality of that dividend. Coke's dividend is well-covered — its payout ratio is under 75%, and free cash flow covers it by a wide margin. Altria's payout ratio is over 80%, and its free cash flow is under pressure from declining volumes and litigation costs. Luna: So Altria's dividend yield, which I think is over 8% right now, is actually signaling risk rather than opportunity. Lucas: Exactly. The market is pricing in a potential cut. Look at the five-day — MO dropped almost 7%, and that's on top of a longer downtrend. Meanwhile, Coke's yield is around 2.7%, but the market sees it as safe and even growing. Luna: But what about P&G and Johnson & Johnson? They're also defensive staples, and they're down — PG lost 2.3%, JNJ lost 2.9%. Lucas: Different stories. Procter & Gamble faces input cost inflation and a stronger dollar headwind, which hit international revenue. Johnson & Johnson has talc litigation overhang and a slower growth profile. But they're not in the same danger zone as Altria. Their free cash flow coverage is still solid. Luna: So the common thread is free cash flow. You mentioned that in episode 131, but it's really playing out now. Lucas: It's the metric that matters. When the yield curve steepens and the ten-year hits 4.67%, investors demand a higher margin of safety. Companies with wide free cash flow moats — like Coca-Cola — can actually benefit from a rotation away from more speculative names. Luna: And this steepening is driven by the two-year yield dropping to 4.22%, while the ten-year rises. The spread widened from 35 to 45 basis points in a week. Lucas: That's important. A steepening curve often signals that the market expects higher growth or inflation ahead. That can benefit companies with pricing power, like Coke, because they can pass on costs. Altria, on the other hand, has less pricing flexibility because its customers are already price-sensitive. Luna: So what should a dividend investor do right now? Chasing yield seems dangerous. Lucas: Exactly. Focus on payout ratios below 70%, free cash flow coverage above 1.5 times, and a track record of dividend growth. You can look at the SCHD ETF — it's up 0.4% this week, outperforming VYM which is down 0.2%. SCHD's quality screen is working. Luna: And individual stocks like Coke are beating the ETFs. Lucas: For now. But the key lesson this week is that not all defensive dividends are created equal. The market is rewarding cash-flow strength and punishing balance-sheet weakness. That's a trend that could continue if the yield curve keeps steepening. Luna: Interesting. So we're not in a blanket rotation out of dividends — it's a rotation within dividends. Lucas: Exactly. Quality over yield. And that's a framework that should serve investors well no matter what the Fed does next.