Among the ultra-high yielding dividend stocks that have been around for a long time, you won’t find many more reliable ones than Altria Group (NYSE: MO)The company has consistently paid a generous dividend and its stock is one of the market’s rare Dividend Kings, meaning management has increased its dividend at least once a year for at least 50 consecutive years.
And indeed, like clockwork, Altria raised its usual dividend once a year this summer. Here’s a look at the details of the increase and whether it helps make the cigarette giant’s stock worth owning.
A king in his industry
In mid-August, Altria announced its latest dividend increase. It decided to raise its quarterly payout by 4% to $1.02 per share, which increases its forward yield to 7.7% based on the most recent closing price. The first distribution of the raised funds will take place on October 10th to investors who were registered on September 16th, so there’s still time for dedicated income stock fans to take advantage of the increase.
But should they? I’ve been convinced for a while that Altria stock isn’t a long-term winner, no matter how high the yield — and the dividend is certainly there, paying multiple times the 1.3% average yield of S&P 500 index component shares.
Altria’s big problem is the ongoing and severe decline of the traditional cigarette market. With increasing public health awareness and anti-smoking campaigns from influential agencies like the federal government, a large segment of the American public has shunned cigarettes. From 2001 to 2021, hardly an epic period, the number of cigarettes sold in the U.S. fell by more than half to over 190 billion in the last year, according to data collected by Statista.
Understandably, Altria is trying to pivot to what it calls “a smoke-free future.” That will be anchored by NJOY, the e-cigarette brand it acquired in June 2023 for a cool $2.75 billion in cash after the debacle that was its investment in the troubled JUUL brand. The company was quick to point out in its latest quarterly earnings that its shipment volumes for NJOY devices were up 80% quarter over quarter to 1.8 million units, and the brand’s market share rose 1.3 percentage points to 5.5%.
That’s impressive to a degree, but then again, NJOY is a relatively new brand for Altria and its mass rollout here only recently began. So it feels like those solid shipment numbers are coming from a relatively low base. And while vaping is a growing trend, it may not be the savior of the cigarette industry. Again, according to Statista, the estimated compound annual growth rate (CAGR) for e-cigarette revenues from 2024 to 2029 is 5.8%.
That’s certainly not a bad number, but probably not enough to offset the seemingly perpetual decline in traditional cigarette sales. Altria’s second-quarter net sales fell nearly 5% year over year, largely because of this.
Of yield hunters and yield traps
Most investors considering buying shares of Altria or its publicly traded competitors like Philip Morris International And British American Tobacco (BAT) are well aware of the challenges facing the industry. Yet they have recently been pouncing on all three companies, as the trio have remarkably outperformed the S&P 500 index so far this year.
I think a big part of this popularity is due to yields; all three stocks have high numbers, with Altria’s theoretical 7.7% being only slightly outpaced by BAT’s 8%. Philip Morris is a laggard among the three, but still yields an attractive 4.3% on its payout.
Yield chasing is all the rage these days, especially with Federal Reserve (Fed) Chairman Jerome Powell’s near-instant promise to cut key interest rates in the near future. Since these rates are a benchmark for almost all financial assets, investor payouts, like bond coupons, tend to fall when rates fall. It’s no wonder that some market players are eager to get their hands on stocks with reliably high payouts.
In my opinion, this has inflated the stock prices of the tobacconists. It only exacerbates the secular decline in what is still their core business. I do not believe these price increases are sustainable and the industry as a whole is on the verge of a correction. Meanwhile, the tobacconists are not the only high dividend-yielding stocks in town, far from it. We only have to look at the real estate investment trusts (REITs), for example, to find solid companies with generous payouts.
It’s always tempting to buy into a company that has announced a dividend increase, especially one that is raising an already ultra-high dividend yield. However, I think Altria qualifies as a yield trap at this point. I wouldn’t buy the stock, especially not in the long term.
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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool recommends British American Tobacco Plc and Philip Morris International 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.
This Ultra High-Yield Dividend Stock Just Raised Its Payout. Should You Buy? was originally published by The Motley Fool
