Latest / Dividend Investing with Fexingo: Income Stocks, Yield, and Long-Term Cash Flow Portfolios / Dividend Stock Correlations in May 2026
Transcript
- Lucas: Luna, let me ask you something. When you think about dividend stocks, do you picture them as a safe harbor away from the market's ups and downs? Luna: I think a lot of investors do. Dividends feel steady, right? But what we've seen this week in late May 2026 suggests maybe not always. Lucas: Exactly. The S&P 500 is up about 1.4% over the past five days. The Nasdaq is up over 2%. Yet look at some classic dividend payers: Coca-Cola down 3%, Johnson & Johnson down over 3%, Altria down nearly 6%. That's not exactly a safe harbor. Luna: So what's happening? Are dividend stocks suddenly correlated to something else? Lucas: They've always been correlated — just not as tightly as growth stocks. The correlation between the S&P 500 and a high-dividend ETF like VYM over the past year is about 0.85. That's not 1.0, but it's close. When the market rallies hard, dividend stocks often lag. Luna: Right — because they tend to be lower beta. But a 0.85 correlation means they still move together most of the time. Lucas: Yes. And that's the trap. Many investors treat dividend stocks as a separate asset class, but they're really just a subset of equities with a certain factor exposure: value, low volatility, quality. Those factors can underperform in momentum-driven markets, like now. Luna: So what should an income investor do? Avoid dividend stocks altogether when the market's hot? Lucas: No — but understand the correlation. If you already own the S&P 500 via an index fund, adding a dividend ETF doesn't diversify you as much as you think. The correlation between VYM and the S&P 500 is 0.85. Between SCHD and the S&P 500 it's around 0.82. You're getting more yield, but not much diversification. Luna: So how do you actually diversify? Go to bonds? Real estate? Lucas: That's one path. But even within equities, you can look for dividend stocks with lower correlation to the market. Utilities, for example, have historically had a beta around 0.6 and a correlation closer to 0.7. Consumer staples like Procter & Gamble, which we've talked about before, have a beta around 0.5. Luna: But Procter & Gamble is down this week too, just less. It's off 0.6% while the market is up. So it's still negative correlation in a rally? Lucas: Exactly. Negative correlation — or at least very low positive — is what you want for true diversification. P&G's five-day return is negative 0.6% versus the S&P's plus 1.4%. That's a classic defensive stock behavior. Luna: So you're saying the yield isn't the only thing to look at. You need to check how the stock moves relative to the market. Lucas: Right. A high yield can actually be a warning sign. Altria yields around 8% but its five-day drop of nearly 6% suggests it's not just defensive — it's reacting to company-specific risks like regulatory pressure and declining volumes. Its correlation to the market might be lower, but its total risk is higher. Luna: So you want a stock with a decent yield, low correlation to the market, and stable business fundamentals. Lucas: Exactly. Realty Income, ticker O, is a good case. It's a triple-net lease REIT, so it behaves somewhat like a bond. Its five-day return is down 0.8%, but its 30-day correlation to the S&P is around 0.6. That's lower than most dividend stocks. And it yields about 5.5%. Luna: But isn't Realty Income also sensitive to interest rates? With the ten-year at 4.45%, down a bit this week, that might help. Lucas: It does. REITs have their own correlation to rates. But the point is, you can build a dividend portfolio that's genuinely different from the broad market. You just have to measure the correlation, not assume it. Luna: How would a regular investor actually check correlation? Is there a simple way? Lucas: Many brokerage platforms offer a correlation matrix or a beta figure. Beta is a measure of correlation to the market, scaled by volatility. A stock with a beta of 0.7 tends to move 0.7% for every 1% market move. That's a rough proxy. But correlation itself — the R-squared — is better. Luna: So what's a good R-squared for a diversifier? Below 0.7? Lucas: I'd say below 0.7 is decent for a diversifier within equities. Below 0.5 is even better, but you rarely find that in dividend stocks unless you go into preferred shares or certain sectors. Utilities and consumer staples often have R-squared around 0.6 to 0.7. Luna: And what about the dividend ETFs themselves? VYM has a beta around 0.9, so it's not really diversifying much. Lucas: Right. VYM's five-day return is up 0.3% while the S&P is up 1.4%. So it's lagging, but not in a diversifying way — it's just underperforming. True diversification would be a negative or near-zero return when the market is up strongly, like P&G or utilities. Luna: I think a lot of listeners might not realize that their dividend portfolio is just a slower version of the S&P. Lucas: Exactly. And that's fine if your goal is income with lower volatility. But if you think you're hedging against a market downturn, you need to check the correlation. In a panic, correlations tend to go to 1.0 anyway — everything falls together. But in normal rotations, low-correlation dividend stocks can cushion the blow. Luna: So what's the takeaway for someone building a dividend portfolio right now, late May 2026? Lucas: First, know the correlation of each holding to the S&P 500. Second, don't just buy the highest yield — especially if it's from a company with fundamental issues like Altria. Third, consider mixing in lower-correlation sectors like utilities and consumer staples, and maybe a REIT like Realty Income. Luna: And if someone wants to keep it simple, just use a low-beta dividend ETF like SCHD? Its beta is around 0.8. Lucas: SCHD is a good choice. Its five-day return is down 1% while the market is up, so it's providing some offset. But its correlation is still high. For true diversification, you might need to add something like a utility ETF or a bond fund. Luna: One thing I appreciate about this show is we don't have ads interrupting the conversation. We can really dig into the numbers. Lucas: That's by design. We want to keep the focus on what matters — helping you think about your money. If you find value in that, and you'd like to support the ad-free mission, you can find us at buy me a coffee dot com slash fexingo. Luna: It's a simple way to keep these conversations going without any commercial noise. Lucas: So back to correlation. One more thing to watch: the yield curve. With the ten-year at 4.45% and the two-year at 3.99%, the curve is steepening. That typically helps banks and financials, which have higher dividend yields. But it can also hurt REITs and utilities if rates rise too fast. Luna: So correlation isn't static. It changes with the macro environment. Lucas: Exactly. That's why checking it periodically — maybe once a quarter — is a good habit. The stocks that diversified your portfolio last year might not do the same next year. Luna: Great reminder. Thanks Lucas.