Dividend Stocks: Defensive Play or Dangerous Trap?

Dividend stocks have long been considered a safe haven for investors seeking steady income. But in today’s market—where interest rates are rising and economic conditions are shifting—are dividend stocks really the reliable play they used to be? Or are they luring investors into a trap with unsustainable yields and hidden risks? 

In this week’s episode of The Capitalist Investor, Tony Zabiegala and Derek Gabrielsen break down the reality of dividend investing. They explore the history of dividends, the impact of inflation and interest rates, how to evaluate companies with strong vs. weak dividend policies, and what role dividends should play in a balanced portfolio. 

Whether you’re chasing income, planning for retirement, or simply trying to protect your capital, this discussion will help you separate facts from myths and build a strategy that actually works. 

📩 Questions or want help building a strategy? Email us at info@swpconnect.com
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Transcript

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Dividend stocks have been a go to defensive play for decades. But over the last few years rising interest rates and shifting markets, our dividend stocks really a safe bet or a trap for unsuspecting investors chasing yield. Tony, what's going on? Not much, man, not much. Just, you know, got through the holiday weekend. Yeah. And, I got, I got a I got a brisket that I need you to taste. I don't know, I mean, I'm, I'm really struggling with this one, man. It's just I, I'm, I'm settling on it that it was too fatty, and I didn't, you know, trim enough fat off of it. So I'm trying to figure out if it's oily, if it's greasy, or then I was having another conversation with somebody else. Was that corn fed cow or or, we, you know, like, whether it's grass or, or, but, you know, I don't know, I'm, I, I need you to try it. I'm not. I'm very dry. I'm just. I'm lost. I don't know what to. I think it's good, but maybe it's one of those things where like when you make it yourself like. You're like Okay. But everyone else loves it I don't know. All right. What do you do. You do the whole thing. You do full full size or just the, the flat. The whole, the whole thing. Oh, yeah, it was kind of a smaller whole thing. No, I would say it's still maybe like 6 to 8 pounds. It wasn't a 15 pounder or anything crazy. But anyway, I digress. All right. What are we talking about today? Dividend stocks. Yeah, yeah. All right. So, so, yeah, you know, I think, it's always a good topic to, to kind of throw out there because it's, you know, one of those age old debates, right? You know, we talked about, 60, 40 portfolio a couple of weeks ago. And now, you know, it's the dividend versus growth stocks, you know, or, or the value versus growth stocks. So, in, in the, in the last couple of years, with rising interest rates, I think that's kind of put dividend stocks, a little bit out of favor. But as we sit here, you know, basically all time market highs, you know, can those dividend stocks help, you know, sustain, a portfolio, for, you know, if in case there's any market downturns out there, you know, reason number two to, to really get into, dividend investing, is something we, we talk about a lot here, is an income stream. So, you know, it is just we talk about it all the time with planning. How do all the puzzle pieces fit together? You know, I think one of the most important things you can take a look at from from these dividend stocks is, is the income stream that they can create. So, you know, if you're getting, a nice steady, you know, 3% or so income stream from those stocks, it helps take a lot of pressure off of the price fluctuation. You know, when you don't have to sell stocks to fund your retirement, you're just pulling off, the yield or the income. Yeah. But here's the problem. In, the S&P 500 as a whole has a dividend yield of 1.25%. The mags, right? Google, Amazon, Nvidia. You know, I guess you can maybe throw Tesla. They don't pay dividends, right. Their growth stocks most most stocks that pay dividends are kind of grouped into that value play. And yeah I would say over the last few years dividend paying stocks have been not sexy. You know like they're defensive stocks. They're there to generate income and they're usually a sign of a great company great cash flow. They got you know they don't have any debt or they're paying it off. They're giving back to the investor. Adding value of owning a like a share in that company. But when you have a dividend yield on average of 1.25% and maybe even like the Dividend Aristocrats. So if you're unaware of, like, what that is, it's a collection of stocks that pay dividends over the last 25 years and have that had a history of increasing those dividends through those years. That is a staple of a very solid company. They're established. And guess what? They're probably through their growth phase now they are in there grinding forward paying out dividends. Small movements. They're not sexy. They're not in videos where they double in price every year. Right. That those those days are in the past. And when you can also compete. So like the Dividend Aristocrats I would say pay about I don't know like maybe 2% plus or minus, you know, a quarter of a percent or something like that. Why if you're chasing yield, why don't most clients and people that I've talked to are looking at CDs? They're paying 3 to 4% zero risk unless the bank goes out of business. You got, treasuries yielding close to 4%, that you can get on a short term basis, maybe one month, three month, six month, one year. Right. Those are in that 3 to 4% range. Some money markets are paying almost three and a half to 4%. Yep. So this is not good for dividend paying stocks because if you're looking for income, it's not doing the trick anymore. And you can you can try and find like what I would call the yield trap. Right. Why why yield is not safe income. It, some of the red flags are like, hey, if they're, you know, a company might be. Showing a high dividend yield. But that's because maybe the price decreased, right? They're still paying the dividend based on a particular price. And the stock just went down. That's not a good sign because odds are they might be cutting that dividend because they're not doing well. You know, on a historical basis. And they might. Their next step is to maybe cut the rate, right. Cut the, cut the dividend. And once they do that, the stock is going to go down even more. Yeah. So are you really worried about yield or are you worried about growth. You know it's very hard to have both. Right. So that that's the that's the big thing. And some of the other traps are, you know, telecom not like telecom companies typically don't grow anymore. They're just they're, they're they're collecting they're subscription. And they're steady at ease. And they have a high yield. But because they are cash flow positive but they just don't grow that much. I mean, everyone's got a cell phone at this point right now. You're just kind of picking up the scraps like, hey, I don't like Verizon. I'm going to AT&T. You know, so we have those types of, of, of things going on. Same thing with REITs. Right. I'm actually more concerned. I mean, you know, you could get into bonds. And this might, you know, I think we've had a show about bonds like this. This could be the time to investigate and get into bonds, because if they if the fed does start, you know, cutting rates, you know, you would think that your bond asset will appreciate too. Yep. So again, what are we chasing? Are we chasing yield or growth. It's again very difficult to do both. Yeah. You know I think you nailed it there with the, the red flags that that's something I definitely wanted to talk about. Because that that's I'd say that's one of the most common and key mistakes that I've seen over the years are kind of the do it yourself investors who are chasing down dividend yield. And it seems that basically no other information matters to them at all. It's only what's the highest yield I can possibly find out there? And like Tony said, those companies are typically not doing very well. So, you know, we don't want to throw, throw everything else out the window just just to track down stocks that are paying a high dividend yields. Right. I know another, you know, the best sectors for for dividend growth. And, you know, right now with health care, right. You know, but and they're kind of a laggard because again not sexy enough right. Right. Not sexy enough Amazon Google Nvidia I just give me more of it. Right. You know for AI to death of at this point I just had that conversation right there. I believe in mean reversion to be you know, I, I don't feel that it's just like the.com bubble. Right. And it it was so fun to. Hey, I bought this stock. You ever hear of it? No. Perfect. I mean, it's going to go skyrocket, right? Did they make any money? No. It's even better. Yeah. Right. That they just created their website yesterday. Great. Things are looking up right like that. Those I feel like we're in that type of fad. But fortunately the the companies that people are chasing today actually make money. They are big. They are gigantic. They are they they don't have that. They're we use them in everyday life. And I'm talking about the mags, you know the Amazons Googles, Microsofts of the world, things like that. Apple. That's the, that's, that's at least the silver lining where it's going to be hard to say. We're going to have a crash because we're chasing ghosts. We're not like they're actually awesome companies, the best in the world. But there's other awesome companies in the world that we use health care companies. Right. Pharmaceuticals. We all, you know, there's a lot of aging demographic that's kind of both of those hit the aging demographic. And they have been laggards. Except for maybe like, you know, someone like Eli Lilly, you know, there with their ozempic, GLP one drugs that have really taken off, energy and utilities, they pay great dividends, but man, they just don't grow. So I said it before, I'll say it again. It's like, what are you chasing right. Yeah. So, so, so we kind of, we kind of laid out there the, the, the pros and the cons of, of the funds. You know, what do we think of kind of the like a dividend ETF versus collecting individual dividend stocks. A lot of research goes into buying individual stocks, I can tell you that, because I see how diligent are, you know, how diligent our investment team works on a day to day basis, trying to identify the stocks that we want to buy. We want to sell. We want to watch, the ETF, you know, broadens your exposure if one if it holds a hundred stocks and that side that ETF and one blows up, are you really going to feel it. Probably not. Yeah. Right. So that's kind of and that's like buying a bond right. Like I'd rather have exposure to thousands of bonds than ten individual bonds. Yeah. To, to get my yield. So but you're, you're going to get grouped in like I said, the S&P 500 is spitting out a 1.25% dividend because not every you know I don't know what the statistic is like 60% of stocks don't pay dividends. And the S&P 500 it's like 40% something like that. So I again it depends I guess maybe on your risk, your risk scale and your how good are you at picking stocks. Right. If you're not good at it then I would I would punt on that. I'm picking individual stocks. Because honestly, if you're chasing yield and you see one that's high, it could be alarming. It could be worrisome. Right? Right. So, so that's my take. How do you feel about that there? Yeah. You know, I, we talked about it several times, especially with the, the technology and the AI stocks. You know, no one out there is, is an expert at all those things. So using managers and using, you know, kind of lower cost ETF funds, they're just going to give you a much more broad and diversified basket of stocks. We and we talk all the time, you know, by the time it hits your phone or your TV, it's the, the news that you just read is already priced in. So there's with with with how information travels these days, is very hard to get an inside edge that way. Just, you know, knowing the stuff that the market does not know. So, having an expert kind of help you out and pick those broad basket of stocks, can be both safer and easier for the investor. Yeah. It's just like our growth and income strategy, our individual stock strategy, our our investment team runs every stock, pays a dividend. We hold anywhere between 35 to 50 stocks at any given point. But it's a diversified basket. We're not holding ten stocks and saying, man, I hope eight out of ten. Well I hope I hope eight of ten work out for you know it's diversified. We're holding the pharmaceuticals. We are holding the banks. We are holding I stocks a telecommunications. We're all we're holding the big boys too. But we're missing some of them we don't own like that strategy doesn't own Amazon and Google and Nvidia because they don't pay dividends. So we're we're sticking to our guns. And that portfolio is actually doing very well. And it doesn't mean that we can't add them to the portfolio. If a client really wants them added, we can add them. But honestly, I it's having the conversation the other day with the yesterday with the client saying, hey, is Nvidia still a good buy? Like you know, do you believe it's going to 500 in a few years? I mean, it could okay. But it also went up 100% in the last 2 to 3 months. Right. So I don't know as of right now, right now, the perfect time to buy it, I don't know. Right? I, I would I would probably say no, but I could be wrong. Right. I'm not I leave that to my investment team. Right. And I just feel like Nvidia would be a stock you'd want to hold forever. Like Apple. Yep. Right. Absolutely. You know, I was just about to say that, you know, and you guys are probably sick of us talking about it. But time in the market is better than timing the market. You know it's these day to day fluctuations. You know, they're very hard to predict. You know, it's it's much better to figure out what your overall strategy looks like and stick to that strategy. So we're we're not hopping in and out of, you know, different different types of stocks all the time. Right? I mean, if again, like the the story on Nvidia is like if you believe it's going to $500, do you care what you buy it at? I know entry point is an important thing, but if you're looking for the next dip and it doesn't come, what are you doing? You're not involved. So if your goal is that in a few years, it's going to be 500, whether you buy it at 180 or 150, obviously you'd like it at 150, but if you missed it and you got in at 180, I don't know, like but it's going to 500, right. So what I you know, it's almost like, you know it by being greedy. You could miss out. Yeah. For sure. But, you know, to kind of wrap this up, final thoughts is I do believe dividend investing will have its time again. Yep. Because when the fed starts cutting rates and, you know, I guess high yield, safe, quote unquote safe bets like money markets, CDs, things like that, they will be coming down as the fed cuts rates too. Right. I you know, again, we have these mags that are dominating or have dominated, maybe not this year in 2025, but in 23 and 24 have dominated the, they have dominated the index performance. Right. Ten stocks have, you know, left 490 stocks behind. So I mean reversion all you need is something. What was that thing called like deep seek. Right. Like a year ago like came out and said hey we can produce I like at a 10th of the price and everything got rocked. It rattled everybody's cage. Well, it was not true. But what happens when the story comes out and it is true. It could. Yeah. You don't know. So again diversification is important. And that's the big takeaway. Diversified portfolios is you know you might not hit a home run when ten stocks dominate the index. But when they don't you will outperform the index because those ten brought it down right. Like that. Something needs to happen. Either the 490 stocks need to catch up or ten need to come back down to earth. So diversification. Yeah, that's the that's the name of the game. Absolutely. All right. Well good stuff this week. If you guys have questions on dividend investing or anything else maybe some topics for, future show. Hit us up at info@connect.com, and we'll talk to you next week. The opinions expressed in the podcast. Are for general informational purposes only, and are not intended to provide specific advice or recommendations for any investment, legal, financial or tax strategy. It is only intended to provide education about the financial industry. Please consult a qualified professional about your individual needs.