Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Why Defensive Dividend Stocks Outperform in July Tech Selloff
Transcript
- Lucas: So here we are, July 27th, 2026, and the market is telling two very different stories. The Nasdaq is off three and a half percent over the past five days, and the S&P 500 is down about one point three percent. But you look at some classic dividend stocks and they're absolutely ripping. Luna: Yeah, I saw Verizon up over eight percent. Johnson and Johnson up over six. What is going on? Lucas: Right. So Verizon, ticker V-Z, is up eight point one percent in five days. Johnson and Johnson, J-N-J, up six point one percent. Even Coca-Cola, K-O, is up two point six percent. Meanwhile, the tech-heavy indexes are getting hammered. It's a classic rotation into defensive income plays. Luna: And what's driving the tech selling? Is it all that AI spending concern? Lucas: I think that's a big part of it. Moody's came out on Friday and said the 'unprecedented' AI spending by Amazon, Meta, Alphabet, and others is threatening their credit quality. Investors are starting to second-guess the massive capital outlay with no clear near-term payoff. And you've got Steve Eisman, the 'Big Short' guy, saying he's having doubts about AI and just sold a key tech stock. Luna: So when tech gets wobbly, money flows to places with known cash flows and dividends. That makes sense. Lucas: Exactly. And it's not just any dividend stocks. The ones with strong free cash flow coverage and stable payout ratios are winning. Verizon, for example, has a dividend yield around six percent, but more importantly, its free cash flow covers the dividend comfortably. Same with Johnson and Johnson — that company has increased its dividend for over sixty consecutive years. Luna: So it's not just about yield. It's about sustainability. Lucas: Right. A high yield is meaningless if the company can't maintain it. What we're seeing now is a flight to quality within the dividend universe. The yield curve is also steepening — the spread between the ten-year and two-year Treasury is now thirty-six basis points, up from thirty-four last week. That traditionally benefits sectors like financials, but it also signals that the market expects growth, even if tech is taking a breather. Luna: But Verizon and JNJ aren't exactly growth stories. Why would a steepening curve help them? Lucas: Good question. It's less about the curve directly helping them and more about the overall environment. A steepening curve often means the economy is expected to improve, which reduces the risk of dividend cuts in cyclical sectors. But for defensive stocks, it's about relative safety. When the Nasdaq drops three and a half percent in a week, investors get nervous. They pile into stocks with predictable earnings and reliable dividends. Luna: And the Fed is still flat at three point six three percent. No rate cuts on the horizon. Lucas: Correct. The Fed funds rate has been steady since June. So the income from dividend stocks is still competitive compared to bonds. The ten-year yield is around four point six nine percent, down a bit from last week. So Verizon's six percent yield looks attractive, especially with the potential for dividend growth. Luna: Let's talk about Coca-Cola. It's up two and a half percent, not as much as the others, but still positive. What's their story? Lucas: Coca-Cola is the classic steady Eddie. They've raised their dividend for over sixty years as well. In this environment, the stock is acting like a bond proxy. The yield is around three percent, but the total return comes from slow, consistent price appreciation plus dividend growth. Investors are willing to pay a premium for that stability right now. Luna: What about Altria? It's flat over the past five days. Why isn't it participating? Lucas: Altria, M-O, is actually down a tenth of a percent. It's a high-yield stock — over eight percent — but it faces structural headwinds from declining smoking rates and regulatory pressures. The market is rewarding quality defensive stocks, not just any high yielder. Altria's free cash flow is still strong, but investors are worried about long-term volume declines. Luna: So it's a flight to the highest quality within the defensive space. Lucas: Exactly. And that's a key lesson for dividend investors. During a rotation like this, you want to own companies with wide moats, strong balance sheets, and a history of growing dividends through various cycles. That's Verizon in telecom, JNJ in healthcare, KO in consumer staples. Luna: And the payout ratios? Are they all comfortable? Lucas: Let's check. Verizon's payout ratio is around fifty-eight percent based on this year's earnings estimates. That's very manageable. Johnson and Johnson is about forty-five percent. Coca-Cola is around seventy-five percent, but their cash flow is so robust that it's still safe. Compare that to some high-yield REITs or energy stocks that pay out ninety percent or more, and you see the difference. Luna: So the market is rewarding discipline. Lucas: Absolutely. And I think this trend could continue if tech earnings disappoint in the coming weeks. The big tech reports are still coming, and if we see more caution on AI spending, the rotation into defensives could deepen. Luna: Speaking of which, if this conversation has been valuable — and I know it has for me — it's exactly the kind of thing that makes listener support so meaningful. If today's episode was worth a coffee to you, you can find us at buy me a coffee dot com slash fexingo. Lucas: Yeah, that's a great point. We keep this show ad-free and independent, and that only works because of the community. So if you found this breakdown useful, that's the link. No pressure, just appreciation. Luna: And honestly, even a small contribution helps us keep digging into these topics. Thanks for considering it. Lucas: Alright, back to the data. So how do you position a portfolio for this rotation? One approach is to overweight sectors like healthcare, consumer staples, and telecom, and underweight tech and discretionary. But it's also about individual stock selection. Luna: Are there any dividend ETFs that capture this dynamic? Lucas: Sure. Look at SCHD, the Schwab U.S. Dividend Equity ETF. It's up one point nine percent in the last five days, outperforming the S&P. VYM, the Vanguard High Dividend Yield ETF, is up one point four percent. DVY, the iShares Select Dividend ETF, is up one point four percent as well. These ETFs have heavy weightings in the defensive sectors we talked about. Luna: So they're giving you diversified exposure to the same theme. Lucas: Exactly. But you have to watch the turnover. Some dividend ETFs rebalance frequently, which can create capital gains distributions. For a taxable account, that's a drag. But for the core exposure, they're a solid choice. Luna: What about individual stocks? Are there any other names you'd highlight? Lucas: I'd also look at Procter and Gamble. It's up one point one percent in the five days, modest, but it's a consistent dividend grower. And it's benefiting from the same flight to quality. Also, Realty Income, the triple-net lease REIT, is up only zero point eight percent, but it yields over five percent and has a great track record. The key is to find stocks that combine yield with stability. Luna: And as we head into August, what are you watching? Earnings? Fed signals? Lucas: Both. Next week we get more consumer earnings and inflation data. If CPI comes in hot, rates could stay higher for longer, which might lift dividend stocks further as a bond substitute. But if tech earnings surprise to the upside, the rotation could reverse. I'm watching the VIX and the yield curve closely. A steepening curve with falling equities is a classic defensive rotation signal. Luna: So the playbook is to stay defensive but selective. Lucas: Exactly. Dividend investing isn't about buying the highest yield anymore. It's about owning businesses that can sustain and grow their payouts through any environment. And right now, the market is rewarding that discipline.