Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / How Dividend Kings Survive The Rate Cycle
Transcript
- Lucas: Look at the ten-year Treasury yield right now. It’s hovering around four point nine six percent as of late October, and that number is doing a lot of heavy lifting in our conversations about income portfolios. When risk-free money pays almost five percent, the bar for picking individual dividend stocks just got significantly higher. Luna: Exactly. So if I’m pulling cash out of high-yield real estate investment trusts or speculative tech stocks to buy Treasuries, what is left on the table that actually offers a reason to stay invested in equities? It can’t just be the hope of capital appreciation anymore. Lucas: It has to be durability. And specifically, it has to be pricing power. We are looking at companies that can raise prices faster than inflation without losing volume. Let’s talk about Coca-Cola. Their stock is trading around ninety-two dollars, and while the yield might look modest compared to some of the junkier names out there, their ability to pass through cost increases globally is unmatched. Luna: But isn’t that pricing power already baked into their valuation? If everyone knows Coke can raise prices, doesn’t that just mean you’re paying a premium for safety? Lucas: That is the core tension. You are paying a premium, yes. But let’s look at the balance sheet mechanics. When the effective Fed Funds rate is sitting at three point seven five percent, debt service costs rise for everyone. A company with sticky demand and global distribution, like Procter & Gamble or Johnson & Johnson, doesn’t just survive higher interest expenses; they offset them with margin expansion. That is the gap we are trying to find. Luna: So you’re saying the metric isn’t the yield itself, but the free cash flow coverage ratio after debt service? Because if they’re borrowing at higher rates to fund share buybacks, that yield is an illusion. Lucas: Precisely. And this brings us to the specific case of Verizon. We’ve talked about telecom before, but the lesson here is stark. After their dividend cut last year, the market forced a re-rating of their entire sector. Investors realized that legacy telecom infrastructure requires massive capex, and when rates are high, that debt becomes toxic. You don’t want to be holding a dividend stock that is leveraged to build towers when the cost of borrowing is five percent. Luna: Right, because those towers don’t generate enough cash flow to cover both the capex and the interest expense comfortably. So we’re moving away from capital-intensive utilities and toward asset-light consumer staples? Lucas: Not entirely asset-light, but certainly less capital-intensive. Think about the difference between a utility that needs to replace aging grid infrastructure versus a beverage company that just needs marketing spend and bottling contracts. The latter has much higher return on invested capital. In this environment, ROIC is the only truth. If your return on invested capital is lower than your weighted average cost of capital, you are destroying value every time you raise a dollar. Luna: That sounds like a brutal filter. Most retail investors just look at the payout percentage. They see seventy percent and think safe. They don’t calculate the WACC. Lucas: They don’t, because it’s hard. And that’s why the big funds are rotating. Look at the VYM ETF. It’s up slightly, but the underlying composition is shifting toward companies with strong balance sheets and low leverage. We are seeing a flight to quality that isn’t about growth; it’s about solvency. The S&P 500 is down nearly one percent over the last five days, driven largely by tech selling off. But the defensive sectors are holding up because they aren’t dependent on future earnings speculation. They are dependent on current cash. Luna: So if I’m building a portfolio for 2026, I should avoid anything that relies on cheap debt to fuel its dividend. I need companies that are cash-generative by nature, not by financial engineering. Lucas: Exactly. And this leads me to a small request. If our conversations about cash flow quality and interest rate risks have helped you clarify your own investment stance, consider supporting the show directly. It helps keep these deep dives ad-free and allows us to keep digging into the data. You can support us at buy me a coffee dot com slash fexingo — that's F. E. X. I. N. G. O. Luna: Yeah, we really appreciate it. It makes all the difference in being able to spend time on these specific case studies instead of rushing through headlines. Lucas: Thanks for listening. Now, back to the data. Let’s look at Johnson & Johnson. Their stock is trading near two hundred sixty-three dollars. On the surface, the yield is decent, but the real story is their diversified revenue streams. Healthcare, pharmaceuticals, consumer goods. When one segment faces regulatory headwinds, the others cushion the blow. Luna: Is that diversification actually working right now though? I’ve seen headlines about litigation costs dragging on their margins. Doesn’t that eat into the free cash flow you’re talking about? Lucas: It does, and that’s a fair point. Litigation reserves are a real drag. But compare that to a pure-play pharmaceutical company facing patent cliffs. J&J has been managing these legal overhangs for decades. Their dividend history spans fifty years of consecutive increases. They have proven they can pay through crises. In a world where the thirty-year Treasury is yielding five point twenty-nine percent, that track record of reliability has intrinsic value. Luna: So you’re valuing the certainty of the payment stream over the absolute size of the yield. That’s a very patient way to invest. Lucas: It’s the only way to invest when you believe rates will stay higher for longer. If you chase a six percent yield in a utility stock, you might get the yield, but you could lose fifteen percent of your principal if the bond market rejects your credit rating. With J&J or KO, you are buying insurance against volatility. The dividend is the bonus, not the primary engine. Luna: I guess that means I need to stop looking at the yield table and start looking at the debt maturity schedule. If their major debt refinances at five percent, can they still afford the dividend hike? Lucas: Yes. And that is the key question. For J&J, the answer is likely yes. Their operating cash flow is robust. For a smaller consumer discretionary name, the answer might be no. That’s where the divergence happens. We are seeing a split in the market between companies that are essentially toll roads—collecting fees regardless of economic conditions—and companies that are cyclical playthings. Luna: Toll roads. I like that. So Coca-Cola is a toll road on your wallet. You buy a soda, you pay the price, they collect the fee. It’s predictable. Lucas: Exactly. And unlike a physical toll road, they can adjust the toll every time they introduce a new flavor or shrink the package size slightly. That flexibility is priceless in an inflationary environment. Meanwhile, a cyclical retailer has to beg customers to visit during a recession. They can’t just raise prices without risking volume collapse. Luna: So the strategy is: buy the toll roads, avoid the cyclical retailers, and ignore the high-yield traps that are masking leverage as income. Is that the summary? Lucas: That’s the gist. And remember, this is happening while the broader market is twitchy. The NASDAQ is down nearly two percent this week. Tech is getting crushed by the reality of high rates. But the dividend aristocrats are sitting quietly, generating cash, and growing their payouts. It’s boring, but it’s profitable. Luna: Boring is good when your portfolio is supposed to be boring too. I think the biggest mistake people make is thinking they need excitement to make money. They just need discipline. Lucas: Discipline and due diligence. You have to read the annual report. You have to check the interest coverage ratio. You can’t just click a button and buy an ETF without understanding what’s inside. Especially now, when the spread between safe yields and risky yields is so wide. Luna: Agreed. So next time you see a stock offering eight percent yield, ask yourself: who is funding this? Is it profits, or is it debt? If it’s debt, run. Lucas: Run fast. Because when the music stops, and it always does, you want to be holding something that generates cash from operations, not something that generates cash from issuance. Luna: Or issuance of bad news. Which seems to be what’s driving the rest of the market today. Lucas: Probably. But we’ll save that for another episode. For now, stick to the toll roads. Keep your leverage low, and let compound interest do the heavy lifting. Luna: Simple advice, but rarely followed. Thanks for breaking it down, Lucas. Lucas: My pleasure. I’ll leave you with this thought: in a rising rate world, the best dividend is the one you don’t have to worry about losing.