Altria (NYSE:MO) is often considered a stable dividend investment for conservative investors. It is the largest tobacco company in America, it generates stable earnings growth, and it has increased its dividend every year since it spun off Philip Morris International in 2008, and pays a high term yield of 8.5%.
Altria’s high yield may seem tempting because the potential for rate cuts makes CDs, government bonds and other fixed-income investments look less attractive. The stock also looks dirt cheap at 9 times forward earnings.
But despite these strengths, I wouldn’t touch Altria with a 10-foot pole because its core market is stuck in a prolonged downturn.
From 2018 to 2023, Altria’s annual cigarette shipments fell from 109.8 billion sticks to 76.3 billion sticks as more Americans quit smoking. Its flagship brand Marlboro also saw its retail market share drop from 43.1% in 2018 to 42.1% in 2023. To offset that pressure, Altria repeatedly raised prices, cut costs and bought back more shares to boost earnings per share increase. EPS).
But in the long term, I believe that strategy will collapse unless Altria meaningfully diversifies its business away from cigarettes. So instead of investing in this tobacco giant and hoping it will sell more e-cigarettes and non-smoking products to offset those losses in the future, I believe it’s smarter to invest in the classic income stocks. Real estate income (NYSE:O).
What does Real Estate Income do?
Realty Income is one of the largest real estate investment trusts (REITs) in the world. REITs buy many properties, rent them out and share the rental income with their investors. To maintain a favorable tax rate, they must pay out at least 90% of their taxable income as dividends. It currently pays a forward yield of 5.8%, pays monthly dividends and has increased its payout a whopping 125 times since its 1994 IPO.
Realty Income is a net lease REIT, meaning its tenants cover most of their own property management costs, such as maintenance fees, property taxes and insurance costs. It owns 15,450 properties around the world, and its top tenants include resilient retailers such as Wal vegetables, 7-Eleven, Dollar general, Money treeAnd Walmart.
Some tenants have suffered store closures in this challenging macro environment, but occupancy rates have never fallen below 96% over the past thirty years.
Why is Realty Income a better investment than Altria?
Realty Income pays a lower dividend yield than Altria, but has an evergreen business model that isn’t stuck in a prolonged downturn. While Altria must carefully raise prices, lower costs and invest in new products to continue growing its profits, Realty Income simply needs to buy more properties, rent them out and maintain high occupancy rates.
Realty Income stock will also become a lot more attractive as interest rates fall. Share prices have already fallen more than 20% in the past three years as rising interest rates made it more expensive to take on new debt and buy new properties. Higher interest rates also made fixed-income investments more attractive than REITs and dividend stocks.
But with interest rates falling, these investors should turn their attention back to top REITs like Realty Income. And at $53, Realty Income’s shares look historically cheap, at just 13 times last year’s adjusted operating funds (FFO) per share. That could be why insiders have bought more than twice as many shares as they sold in the past twelve months.
Should You Also Buy Realty Income Instead of Altria?
Altria has outperformed Realty Income over the past three years, but that was mainly because the former was less sensitive to interest rate increases than the latter. Once closely watched interest rates stabilize and fall again, Altria will become a less attractive investment as investors focus on declining cigarette shipments and market share loss.
At the same time, Realty Income’s stable growth should make it a more attractive income investment. That’s why I believe now is the right time to move away from high-yield value traps like Altria and return to undervalued REITs like Realty Income.
Should You Invest $1,000 in Altria Group Now?
Consider the following before purchasing shares in Altria Group:
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Leo Sun has positions at Philip Morris International and Realty Income. The Motley Fool holds positions in and recommends Realty Income and Walmart. The Motley Fool recommends Philip Morris International. The Motley Fool has a disclosure policy.
I Wouldn’t Touch This Stock With a 10-Foot Pole — Here’s What I’d Buy Instead was originally published by The Motley Fool
