Ep. 42: Monthly Dividend Safety, JNJ Slow Growth, Goldman Sachs Earnings, and Covered Call ETF Rankings

Imagine you find a stock yielding 15%, you buy it, you, uh, you'd live off that massive
income screen and you basically feel like a genius. But then, you know, two years later,
you lug into your brokerage account and realize your initial investment has practically vanished.
Yeah, that's, uh, that's the nightmare scenario. Right. You haven't made money at all. You've
just been slowly eating your own seed corn. And so welcome to the yield traps of 2026.
It really is the defining danger of the current market. We are in this environment right now,
where a high dividend yield can either be, you know, a fantastic safety net or a trap door
right beneath your feet. Welcome to the deep dive. We are your ultimate resource for informed
investing, especially for you dividend investors out there. Today, we're looking at a massive stack
of market data and analyst reports from April 2026. And, uh, the landscape is flashing some serious
warning signs yet absolutely is. I mean, inflation is incredibly sticky right now, largely because
of tariffs, right? And Wall Street is predicting maybe one interest rate cut this year if we're lucky.
Yeah, possibly zero at this rate. Exactly. Possibly zero. So for you, the investor trying to build actual
passive income, the old strategy of just, you know, blindly throwing money at reliable names and
taking a nap, it just isn't going to work anymore. Not at all. If you want to survive this year,
you have to actively steer the era of like, set it and forget it dividend investing is taking a
hiatus right now, which is incredibly frustrating because I mean, everyone loves the dream of passive
income sitting on a beach, collecting checks. But, uh, before we get into specific stocks to buy or
avoid, I want to talk about how we actually organize a portfolio in this mess. That's the best place
to start. Definitely. Because looking at this data, it seems like people are just grabbing yields at
random. So how do you structure this? So your whole portfolio doesn't just collapse. Oh, you need
a structural blueprint. Yeah. And the best framework for this is what we call the dividend pyramid.
Okay, let's unpack this. What exactly does the pyramid look like? So it forces you to visualize the
inverse relationship between yield and growth at the very top of the pyramid. You have your low yield
high growth assets like tech stocks, right? Exactly. Massive technology companies. You might only get
say a 1% starting yield today, but they are growing that dividend payout at 10 or 15% a year.
Oh, wow. Okay. Yeah. And then as you move down to the base of the pyramid, you find the high yield
low growth assets. Okay. So what lives at the bottom there? These are your real estate investment trusts,
REITs and business development companies or BDCs. They pay you 7, 8 or maybe 9% today, but that
payout is barely going to grow over time. Right. So you have to decide where you want to live on that
pyramid. And I noticed the data outlines three model portfolios based on this. Yes. It gives you
a few different roadmaps. Right. There's a dividend income strategy, which aims for a 4% yield and
5% growth. And it benchmarks itself against funds like SCHD, which is a great benchmark. Yeah. For
newer investors, that's the Schwab US dividend equity ETF, basically the industry standard for solid
dividend payers. But then there's an income growth strategy targeting just 2% yield, but a huge
8% growth. Right. Focusing heavily on the top of that pyramid. And finally, a balanced approach
sitting right in the middle at a 3% yield and 6.5% growth. Exactly. But here's where investors just
completely derail their own plans. No matter which of those three strategies you pick, you have to
actually evaluate the safety of the dividend, which people don't do. They don't. Most people just look
at the earnings payout ratio. They see a company earning $2 a share paying out $1 and they think
well, great. A 50% payout ratio. Totally safe. But earnings can be manipulated, right? I like to think
of earnings as like the Instagram filter of a company's finances. That is a perfect way to put it.
Because a company can just sell off a warehouse or, you know, use some clever accounting trick. And
suddenly their earnings look huge for one quarter. Yep. Completely inflated. And it makes their payout
ratio look fantastic. But it's just an illusion. It's an absolute accounting fiction. Yeah.
The gold standard you should be using is the free cash flow payout ratio. Okay. What's the difference
there? Free cash flow is the actual raw cash moving in and out of the business after capital expenditures.
It's the physical money leftover that can actually be handed to you. The unedited photo,
keeping with the Instagram analogy. Exactly. The raw unedited photo. Yeah. Ideally, you want a company
paying out no more than 60 to 75% of its free cash flow, depending on the specific industry.
Right. Because if they don't have the free cash flow, the dividend growth is basically a ticking
time bomb. It is. Eventually, they will have to cut it. Well, speaking of dividend growth,
I was looking at Johnson and Johnson's numbers this morning and it completely threw me off.
Oh, the recent hike. Yeah. J and J just raised their dividend by 3.1%. And proctor and gamble
did practically the same, like a 3% hike. Now, PG, I sort of understand. Right. The consumer package
good sector is tough right now. Yeah. They're getting crushed by it. Input costs and inflation,
tariffs, all of that. But J and J, they recently raised their 2026 guidance. They're projecting double
digit growth by the end of the decade. And their free cash flow payout ratio is sitting comfortably
around 46%. Okay. Definitely have the cash. They have the cash. So why are they nickel and
diamond investors with a 3.1% hike? It is a shock to the system. I agree. But you have to look
at corporate psychology right now. Johnson and Johnson isn't struggling. They are likely sandbagging.
Sandbagging, like holding back on purpose. Yes. In a highly volatile inflationary 2026, management
teams get very conservative. They want to keep their powder dry. So they might just be setting up for
a much stronger increase next year. But see, here's my problem with that. If I'm building a portfolio,
and my expected portfolio wide dividend growth drops from 5% down to 3% because blue chips like
J and J are dragging their feet, the math gets brutal. It does. It slows the whole compounding process.
To hit my passive income goals, the data says, I suddenly have to contribute up to 56% more net
new capital out of my own pocket. And that is the harsh reality of the dividend snowball. When the
organic compounding slows down, your own savings rate has to carry the burden. There's no way around
the math. So what does this all mean for you and me? If J and J is holding out on me,
my natural instinct is to just dump it. Why shouldn't I just sell J and J and chase some random stock
paying 7% right now to fix my spreadsheet? Because that is exactly how long-term portfolios get destroyed.
Wait, really? Absolutely. You are compromising structural quality for a quick fix. Chasing an
immediate high yield as a bandaid for a blue chip slowdown is the single biggest mistake income
investors make. I hear that, but man, the temptation is overwhelming when inflation is biting.
It feels like chasing yield is like seeing a flashing neon sign outside a roadside diner at 2am.
Oh, that's a dangerous game. It is. Because sometimes it means you're about
to eat the best pie of your life, and sometimes it's a massive warning sign for food poisoning.
How do I know which one it is? Well, you have to understand the actual mechanics of how yield is
calculated. The market is entirely forward looking. Okay. Yield is literally just the annual dividend
divided by the stock price. So if a yield is suspiciously high, say 8, 9, or 10%, it almost always
means the stock price is plummeted, which mathematically pushes the yield percentage up.
Precisely. You have to ask yourself, why is this yield so high? So the market has basically priced
in massive risk. Yes. We've seen this play out with classic value traps recently, like Lumen
Technologies and Walgreens. Oh, Walgreens was brutal. It was investors bought in purely for the
skyrocketing yields, completely ignoring the declining revenues and the crumbling free cash flow.
Wow. Those high yields were actually blaring sirens of an impending stock rash and eventual dividend cut.
And people fall for it because they treat dividends like free money, which mechanically is completely
false. When a stock hits its ex dividend date, the stock price literally drops by the exact amount
of the dividend paid, right? Yes. And this is a mechanism so few investors actually understand.
It's crazy to me. If a $50 stock pays a $1 dividend, the exchange automatically adjusts the stock price
down to $49 on the morning of the ex dividend date. So you aren't actually gaining any new net worth
in that exact second? No. Capital is physically leaving the company's balance sheet and entering your
pocket. It is not a magical bonus from the sky. They are distributing their own net worth to you.
Which is why ignoring total return is such a massive portfolio killer. I mean, the data points
out AT&T versus Coca-Cola over a five year stretch. That's a perfect case study. Right, because AT&T
had a much higher yield so income investors flocked to it. But Coke massively outperformed it in total
return, meaning stock price appreciation plus the dividends because AT&T's underlying business was
just stagnant. It's also the danger of blind loyalty. Just holding a stock forever because it's a
famous brand name we saw with GC penny years ago, or General Motors in the past. People just couldn't
let go. Exactly. The dividend was cut, the stock collapsed, but people held on because they recognize
a logo. So how do you avoid that? This is why using analytical tools like stock analysis.com to check
the max total return of a stock rather than just gazing at the current yield is mandatory. Okay, but
let's be realistic here. There are baby boomers and gen Xers out there who need cash every 30 days
right now to supplement their pensions or social security. True. They don't have decades to
wait for growth. Right. If rate cuts aren't happening, where do they look for safe, monthly paying
stocks without stepping into one of these value traps? Well, the start money in that demographic is
pivoting toward high quality reads and BDCs that we mentioned at the bottom of the pyramid. Okay, any
specific names jumping out names like realty income, which actually goes as far as trademarking itself,
the monthly dividend company or agree realty or main street capital. And these are safer because of
the rate environment. Yes, because interest rates have stayed elevated for so long, the real estate
and lending markets have already priced in the pain. Oh, I see. These specific companies have pristine
balance sheets and offer a legitimate structurally sound way to generate cash right now without eating your
principle. But see, Wall Street knows people are desperate for cash. And that brings us to the
absolute biggest craze of 2026. I know exactly where you're going with this. These ultra high yield
covered call ETFs. I mean, I'm looking at the XLKI ETF right now. XLKI. It is yielding an astronomical
15.06 percent with a tiny 0.35 percent expense ratio. And it's doing this with the US tech sector.
Nvidia, Apple, Microsoft. I look at that and think, wait, I can get 15 percent on Nvidia.
What is the catch here? Explain the actual mechanics to me. The catch is entirely in how that yield is
generated. XLKI is not getting a 15 percent dividend from Nvidia. Nvidia yields almost nothing.
Right, they barely pay a dividend. The fund is generating that massive income by selling short
dated call options on the text docs it holds. Okay, what does that mean in plain English for the everyday
investor? When you sell a call option, you are essentially selling someone else the right to buy
your stock at a specific price if it goes up. Okay. In exchange for taking on that bet, they pay you
a cash premium today. That cash premium is what XLKI distributes to you as a 15 percent yield.
Wait. But if the stocks skyrockets like Nvidia tends to do, I don't get those gains. Exactly.
You sold them right away. You capped your upside. But, and this is the crucial part,
the real danger is on the downside. What happens on a downside? If Nvidia drops 20 percent,
you participate in all of that loss. Covered calls, capped your upside in a raging bull market,
but they leave you completely exposed to the downside in a bear market. Wow, which explains
the whole single stock ETF craze we're seeing. Take the MRNY ETF, which does this exact strategy with
Moderna stock. I chart is terrifying. It's insane. Early this year, it's up over 50 percent year
to date. It looks like an absolute miracle, but you zoom out to its inception and the fund is down
nearly 90 percent because it's mathematically eating itself. Yeah. If you are living off that 15 or 20
percent income, and you are not aggressively reinvesting a huge portion of it back into the fund,
your principle is simply evaporating. And it gets even worse with what they call target income ETFs.
Yes, the Mirage. These are funds promising a flat locked in yield of sometimes 20 percent.
How are they even legally doing that? They do it through severe NaV erosion. NaV is net asset value,
basically the underlying share price of the fund. Right. To force a 20-aprint pay out in a volatile
market, these funds literally cannibalize their own capital. The share price bleeds out to sustain
the illusion of the yield. That is wild. It is the equivalent of selling the tires off your car to pay
for gas. That is exactly what it is. So wait, I could get a 15 percent yield from a tech fund,
but if the underlying stock straw, my principle gets wiped out anyway. Isn't this just a fancy
wall street way of tricking people into eating their own seed corn? It absolutely is. Yeah.
It's vital to look at total return, not just the headline yield. I'll definitely pass on that,
but that leaves you and me with a huge problem. Tech is volatile, covered calls are incredibly
dangerous, and my blue chips like J&J are slowing down. How do you actually play defense here?
How do you hedge against sticky inflation and zero rate cuts in 2026? Well, there are highly specific
instruments designed for exactly this environment. Let's look at their RIS R-E-P-S. Okay, I'm looking
at it. It is uniquely designed to profit from this exact chaotic environment using something called
negative duration. Right. Negative duration. Normally when interest rates go up, bonds and income
funds just get crushed. How does this go up? It holds the interest only portions of government-backed
mortgage securities, things like Genie May, Fannie Mae, Freddie Mac. Okay, mortgage stuff. Right. Think
about it from a regular homeowner's perspective. If you locked in a 3 percent mortgage a few years
ago, and rates jump to 7 percent today, are you going to refinance your house? Absolutely,
no. I'm taking that 3 percent mortgage to my grave. Exactly. And neither is anyone else.
Which means those mortgages aren't being paid off early? You, the homeowner, are going to keep paying
that interest month after month for the full 30 years. Right. Because those interest payments become so
incredibly reliable and long-lasting when raised rise, the asset holding those payments becomes far
more valuable. That is negative duration. When rates go up, RIS R's value goes up. Let me get this
straight. RIS R literally profits when the Fed refuses to cut rates. That is like buying an insurance
policy that pays you every time your neighbor places loud drum kit. I love that analogy. It is a
pure portfolio stabilizer. Just look at the numbers. Since its inception in 2021, RIS R is up
roughly 80 percent. That's massive for an income fund. It is delivered an average 14.5 percent
annualized return. And on top of that, it pays out of 5 to 6 percent yield every single month.
It is the perfect shock absorber for a market terrified of inflation. Okay, so RIS R is the
ultimate hedge. But what if I want to play offense while the market is volatile? I notice the
analyst reports pointing to a pretty huge buy the dip opportunity in TSLX. Ah, six street
specialty lending. A very interesting BDC. Yeah, it's yielding 10 percent, but the stock is currently
down 25 percent from its highs. Now, hold on. Two minutes ago, you literally told me that a 10 percent
yield on a plunging stock is the definition of a value trap. Why is this different? Because you have to
look under the hood at the actual mechanics of their business, not just the stock chart. Okay,
it was under the hood. Historically, TSLX traded at a massive premium to its net asset value,
sometimes a 1.45x premium. Meaning people were overpaying for the assets. Exactly. But right now,
it's trading at only a 5 to 8 percent premium. That's a valuation reset, not a failing business.
If you look at their balance sheet, their debt-to-equity ratio is a very conservative 1.90x.
Okay, but what about defaults? If they are lending money out in a tough, high-rate economy,
aren't their borrowers just going bankrupt? That's the crucial metric to check.
Yeah. You look at non-accruals, which is bank speak for bad loans. TSLX's non-accruals are
sitting below 1 percent. Wow, less than 1 percent. Yes. They do heavy lending, but they structure it
with first-land protections. Yeah. That means if a borrower does go bankrupt, TSLX is legally
first in line to strip the assets and get their money back.
Which is a fascinating contrast to what's happening with traditional big banks right now.
Oh, the hidden risks there are staggering. Yeah, I'm looking at Goldman Sachs. They just reported
a massive Q1 earnings rate, $17.55 in earnings per share. The financial media cheered, the stock rally,
everyone celebrated. Right. But if you actually dig into the report,
their credit-loss provisions, the cash they have to literally hoard because they expect loans to
fail, jumped to $315 million, and their wealth management revenue sequentially dropped.
It is the perfect synthesis of everything we're discussing today. How so?
The Wall Street headline screened that Goldman Sachs is booming based on a manipulated top-line earnings
beat. But the underlying mechanics, the rising credit losses, tell a completely different story.
It's the Instagram filter again. Exactly. Meanwhile, TSLX is flying completely
under the radar, safely doing the heavy lending with firstly loans, offering a legitimate 10% yield.
And it's on sale simply because the broader market panicked. Yeah. You have to look past the headlines.
You really do. Here's where it gets really interesting. But we're running short on time. So,
let's do a rapid-fire recap so you, the listener, can put this all into action. Let's do it.
You now know that to build your dividend pyramid, you have to evaluate safety using free cash flow,
not just earnings. You know, not to panic sell blue chips like J&J, just because they slow down
for a year. And you know exactly why chasing an 8% yield can mathematically wipe out your principle.
You also know how to spot the mechanics of NAV erosion in those 15% covered call ETFs.
Yes, do not eat your seed corn. Right. And most importantly, you have actionable ways to hedge
against inflation with instruments like RISR, while looking for structurally sound dips in companies
like TSLX, which leaves you with one final mindset shift to mull over. In the dividend investing
community, we spend so much time obsessing over the exact size of the check arriving this month.
Everyone loves a big payout. Right. But what if true passive income isn't measured by the yield
of the stock you hold, but by how fiercely you protect the actual machine generating it?
The market desperately wants you to focus on today's paycheck, even if it means cannibalizing your
own capital. But you have to ask yourself, are you optimizing for this month's cash? Or are you
optimizing for tomorrow's total wealth? That is the ultimate question for 2026. It really is. Thank
you so much for joining us on the steep dive. Keep exploring your sources. Always look under the hood
and we will catch you next time.