Real estate income(NYSE:O) And Altria(NYSE:MO) are both popular stocks for income investors. Realty is one of the largest real estate investment trusts (REITs) in the world, paying monthly dividends and having increased its payout 127 times since its initial public offering in 1994. Altria is the largest tobacco company in America and has increased its quarterly dividend Altria has increased its shareholder dividend for 54 years in a row, making it one of the few stocks to earn the title of Dividend King.
Realty Income pays an impressive dividend yield of 5.5%, while Altria pays an even higher yield of 7.2%. Including reinvested dividends, Realty’s total return of 105% also lagged Altria’s total return of 119% over the past decade. But before we assume that Altria is a better dividend than Realty Income, let’s look forward instead of back to see which is the better dividend investment.
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As a retail REIT, Realty Income buys properties, rents them to companies and shares the rental income with its investors. Like other US REITs, it is required to pay out at least 90% of its taxable income as dividends to maintain a favorable tax rate.
Realty owns 15,450 properties worldwide and serves more than 1,500 clients across 90 separate industries. It is a triple net lease REIT, meaning the tenants are responsible for the property’s property taxes, insurance, and maintenance costs.
Realty’s diversification, scale and cost-efficient business model allowed it to grow its adjusted operating funds (FFO) per share at a compound annual growth rate (CAGR) of 5% from 2013 to 2023, even as tenants weathered the pandemic. inflation, rising interest rates and other macroeconomic headwinds.
Some of Realty’s top tenants, in particular Walgreens Boots Alliance And Dollar treeare struggling with slowing sales and store closures. But it still maintained a 98.7% occupancy rate in the last quarter as stronger tenants, such as Walmart And Dollar generalopened more stores to offset that pressure.
Rising interest rates are hurting Realty Income and other REITs because they make it more expensive to buy new properties and discourage retailers from opening new brick-and-mortar stores. They also drove more income investors into risk-free CDs and government bonds. But as interest rates fall, more investors should return to market-leading REITs like Realty Income. At $58, it still seems fairly valued at less than 15 times last year’s AFFO per share.
From 2013 to 2023, Altria’s adjusted earnings per share grew at a CAGR of 8%. But during that same period, annual shipments of cigarettes and cigars fell from 129.3 billion sticks to 78.1 billion sticks. The retail share of the cigarette market also fell from 50.6% to 46.9%. These declines were driven by declining smoking rates in the US, rising excise taxes, competition from smaller brands and the rise of e-cigarettes and other vaping products.
To meet those pressures, Altria has repeatedly raised prices, divested its non-core businesses, cut costs and bought back more shares to grow its earnings per share. However, that strategy will dry up unless new ways are found to grow revenues – which only grew at a CAGR of 3% (net of excise taxes) between 2013 and 2023.
Altria’s best hope is to sell more smoke-free products like snus, nicotine pouches, heated tobacco devices and e-cigarettes, but those efforts have been costly and messy. It invested $12.8 billion in e-cigarette maker Juul in 2018, but that investment disappeared after the US Food and Drug Administration (FDA) banned all Juul products in 2022. To recover from that setback, Altria bought e-cigarette maker NJOY. for $2.8 billion in 2023. But that acquisition will only contribute to cash flow in 2025 and to earnings per share only in 2025. 2026.
At $58, Altria trades at just 10 times last year’s earnings. Analysts still expect earnings per share to grow at a CAGR of 5% between 2023 and 2026, so the business won’t collapse anytime soon. But looking further ahead, Altria’s future looks arguably murkier than Realty Income’s.
Altria pays a larger dividend, but it may run out of room to raise cigarette prices and cut costs to offset declining deliveries. It could also struggle to expand its non-smoke business quickly enough to diversify its business and grow its revenue.
Real estate growth has been held back by rising interest rates in 2022 and 2023, but those headwinds will disappear as those interest rates fall. The business model also does not face major existential challenges. So for now, I believe Realty Income is a much better long-term income investment than Altria, even if it produces lower returns.
Consider the following before purchasing shares in Realty Income:
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Leo Sun has positions in Realty Income. The Motley Fool holds and recommends positions in Realty Income and Walmart. The Motley Fool has a disclosure policy.
Best Stocks to Buy Now: Realty Income vs. Altria was originally published by The Motley Fool
