Tobacco giant Altria (NYSE:MO) offers investors a delicious dividend yield of 9%. It’s a much higher rate than it S&P500 average, which yields only 1.4%. But the danger with Altria is that its payout ratio is high, and its long-term future is questionable given declining demand for cigarettes. Investors who buy the stock are taking on significant risk, especially if they rely on dividend payments to continue.
Rather than investing in high-risk dividend stocks, investors would be better off buying shares of a company that offers a more modest payout but whose longer-term future is much more secure. One of the best and safest dividend stocks to buy and forget today is the consumer goods giant Procter & Gamble (NYSE:PG). Here’s a closer look at why it could be a no-brainer purchase for long-term income investors, despite the much smaller 2.5% yield.
Procter & Gamble just raised its dividend for the 68th year in a row
On April 9, Procter & Gamble announced it would increase its quarterly dividend. At $1.0065, the new dividend is 7% higher than the $0.9407 the consumer goods company previously paid. And over the past five years, Procter & Gamble has increased its dividend by 35% from the $0.7459 it returned to investors in 2019.
The dividend increase marks the 68th consecutive year in which Procter & Gamble has increased its dividend. Even among Dividend Kings, Procter & Gamble has one of the longest dividend streaks. Altria is also part of the group, but has only increased its dividend by 23% in five years. And more importantly, it is less certain that it can continue to increase its dividend at all in the coming years. Currently, Altria’s payout ratio is over 81%; Procter & Gamble’s payout ratio is around 61%.
The company’s activities look very strong
It’s not just dividend bars or payout ratios that investors should consider when looking at dividend stocks. What matters most is the long-term prospects for the company, and on this point Procter & Gamble distances itself as a much safer investment than Altria.
With top consumer brands such as Pampers, Bounce, Gillette and many others in its portfolio, Procter & Gamble has a broad product mix that reaches many different customers. The company can also pass on rising costs to consumers to help offset the effects of inflation. In its fiscal 2024 third-quarter results for the period ending March 31, Procter & Gamble’s net sales rose 1% to $20.2 billion, and diluted earnings per share rose 11% to $1.52. The company expects sales growth for the entire financial year to be between 2% and 4%.
Altria, by comparison, reported sales of 2.5% reject in the most recent quarter (including for the period ending March 31). And while the company’s net profit rose 19%, that was thanks to investment income; operating profit even fell by 3%.
While Procter & Gamble may generate only modest growth, the company looks safe in the long term. Meanwhile, Altria’s numbers may worsen over time as there is less demand for tobacco cigarettes. While the company is trying to transition to oral tobacco products and safer options for consumers, this could be a long and uncertain road for the company. Altria’s dividend still looks safe today, and its financials aren’t that bad, but things could get worse in the coming years.
Procter & Gamble is an ideal income stock to buy and hold
Procter & Gamble’s dividend yield may not seem nearly as attractive as Altria’s. But if you plan to invest for the long term, there is a risk of a dividend cut if Altria’s business struggles. The payout ratio is already a bit high, and with such a high yield, investors aren’t buying up the tobacco company’s stock, which could be a sign that they’re wary of the stock despite what could normally be a tempting dividend.
The healthier and safer approach for investors is to buy Procter & Gamble stock. Over the past decade, it has generated a total return (including dividends) of about 160%, compared to 100% for Altria. And with a brighter future ahead, it will likely remain the better long-term investment.
Should You Invest $1,000 in Procter & Gamble Now?
Before you buy shares in Procter & Gamble, consider the following:
The Motley Fool stock advisor The analyst team has just identified what they think is the 10 best stocks for investors to buy now… and Procter & Gamble wasn’t one of them. The ten stocks that survived the cut could deliver monster returns in the coming years.
Think about when Nvidia created this list on April 15, 2005… if you had $1,000 invested at the time of our recommendation, you would have $525,806!*
Stock Advisor provides investors with an easy-to-follow blueprint for success, including portfolio building guidance, regular analyst updates, and two new stock picks per month. The Stock Advisor is on duty more than quadrupled the return of the S&P 500 since 2002*.
View the 10 stocks »
*Stock Advisor returns April 30, 2024
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Forget Altria: Could It Be the Safest Dividend Stock to Own? was originally published by The Motley Fool
