For long-term investors, dividends are a crucial piece of the performance puzzle. Here’s an almost unbelievable statistic from Harford Funds: Since 1960, 85% of the S&P500‘s cumulative total return was tied to dividend reinvestment.
However, not all dividend stocks are equal. High returns can sometimes entail high risks. Investors should therefore focus on high-quality companies that are able to maintain and grow their dividend payments. Two of the best bets right now are British-American tobacco (NYSE: BTI) And Tangier (NYSE: SKT).
British-American tobacco
Consumption of cigarettes and other combustible products is declining, especially in the US. British American Tobacco expects global tobacco industry volume to decline by about 3% this year, and the company has seen a 9% decline in the US so far.
While British American Tobacco’s core business is in decline, the company is finding success in expanding its so-called “new categories.” These include vaping products under the Vuse brand, tobacco heating products under the Glo brand and modern oral products under the Velo brand.
The Vuse brand of vaping products currently has a 41.1% global value share in the company’s key markets and a 51.5% share in the US. The Glo brand of tobacco heating products has a 16.8% volume share in key markets, and the Velo modern oral products brand has a 27% volume share in key markets. The company expects volumes and sales in these activities to increase in the second half of the year.
Despite the weakness in traditional tobacco products, British American Tobacco expects organic sales to grow by a low single-digit percentage at constant exchange rates this year, with similar growth in adjusted operating profit.
This earnings growth will help support the dividend, which currently yields approximately 9.4% based on the most recently announced quarterly dividend payment. British American Tobacco has also started buying back its shares, which will be funded by monetizing its stake in ITC.
The company plans to spend 700 million pounds (about $889 million) on buybacks this year and 900 million pounds (about $1.1 billion) in 2025, while working to reduce net debt to adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) ratio decreased to a range of 2.0 to 2.5 by the end of this year.
The biggest risk to British American Tobacco shareholders is that sales and profits from new categories may not grow fast enough to offset the decline in cigarette consumption. But since shares trade for less than seven times forward earnings, there is a significant margin of safety for investors willing to take that risk.
Tangier Factory Outlets
Tangier operates 40 outdoor outlet centers near tourist destinations and in suburbs of fast-growing cities in the US and Canada. The company’s tenant base is diversified, with retail partners outside the top 10 accounting for approximately two-thirds of annualized base rent.
Tangier’s business has suffered during the pandemic, but business is now largely back to normal. Occupancy has recovered to 96.5%, not far from historic levels, and lease extensions and re-rents have led to double-digit rent increases.
Tangier has multiple ways to grow. In addition to improving metrics at its existing outlet centers, the company can open or acquire additional outlet centers and generate revenue from adjacent properties. While Tangier’s results will be somewhat sensitive to economic conditions, the value proposition of branded merchandise at discounted prices should hold up in any economy.
Tangier expects to grow net operating income of 2.25% to 4.25% at the same center this year, leading to adjusted funds from operations between $2.03 and $2.11 per share. Based on the current share price, the price to FFO ratio is approximately 13.
Tangier’s dividend isn’t as generous as British American Tobacco’s, but the stock still offers an attractive yield and potential for dividend growth. Based on the last quarterly dividend payment of $0.275, Tanger stock currently yields just over 4%. The dividend has risen significantly in recent years, after a brief pandemic-induced lull in 2020.
Tangier isn’t the bargain that emerged from the pandemic when pessimism ran high, but it’s still an attractive dividend stock for long-term investors.
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Timothy Green has positions in British American Tobacco and Tangier. The Motley Fool recommends British American Tobacco Plc and Tangier and recommends the following options: long January 2026 $40 calls on British American Tobacco and short January 2026 $40 puts on British American Tobacco. The Motley Fool has a disclosure policy.
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