Is This Really the Best Dividend Stock?

The importance of dividends has been well documented over the years, and here at The Motley Fool, there's nothing we like more than a great stock that pays you to hold it. That's why, a few months ago, I wrote an article describing what I thought was the best dividend stock around.

While some readers agreed with my sentiment that ADP (NYSE: ADP) is a superb company that consistently kicks out a dividend of 3.3%, there was overwhelming support in the community for one other, very particular company.

That company is Altria (NYSE: MO).

So in light of the comments I received on my last article, I figured it was only apt to ask the question: Is Altria truly the best dividend stock?

Despite the recession
With unemployment hovering around 9.5%, concerns over a double-dip recession, and the expectation that the U.S. recovery may be stalling, you'd figure that consumers would be reining in their spending -- especially on discretionary products.

However, Altria, which operates through its main subsidiary Philip Morris USA, has continued to boost sales of its tobacco and related products. Despite the recession, raised taxes and regulatory fears, the nation's largest cigarette maker actually boosted net income by 38%. Its leading brand, Marlboro, increased its market share and now owns about 42.7% of the U.S. smoking segment.

In addition, Altria's smokeless tobacco products saw a volume increase of 21.9% and a revenue increase of 24%. Did I mention that Altria has a 27% interest in SABMiller?

Consumers might be spending less, but the products that they're not cutting corners on -- cigarettes and alcohol -- just happen to be Altria's bread and butter.

So what about the dividend?
It's hard to argue against the staying power of Altria's products. You can't ignore the increased revenue or net income, or the fact that over the last 10 years, the stock has seen dividend-adjusted annualized gains of 20% -- far superior to the S&P 500's decline of 2%.

But what about the dividend -- what makes it so great? Let's check the stat book:

Company

Dividend Yield

5-Year Dividend Growth Rate

Paying Dividends Since

Altria Group

6.6%

15.6%

1928

Whenever you're purchasing a stock, and its dividend is part of the equation, you've got to ask yourself several questions: 

  • Has it been paying dividends for quite some time?
  • Has it been increasing dividends?
  • Is the yield comparable to other similarly priced companies?

Altria not only pays a great dividend, but it has been doing so for the last 70-plus years. In addition, its dividend-adjusted stock price has increased an average of 13% over the past half-decade. That combination of yield and capital appreciation is hard to come by. Now I see why so many investors are drinking the Altria Kool-Aid.

In my research, I ran across several other companies with comparable attributes to Altria. I think the following five companies stack up well against the cigarette king, and could possibly give it a run for its money as "the greatest dividend stock":

Company

Dividend Yield

5-Year Dividend Growth

5-Year Annual Return*

Annaly Capital Management (NYSE: NLY)

15.2%

32.4%

11.1%

Telefonica (NYSE: TEF)

8%

26.8%

9.3%

Kinder Morgan Energy (NYSE: KMP)

6.3%

7.6%

12.2%

Unilever (NYSE: UL)

3.8%

6.1%

9.2%

Procter & Gamble (NYSE: PG)

3.1%

12.9%

5.1%

*Compound Annual Growth Rate, dividend-adjusted.

Comparing apples to apples
Unilever and Procter & Gamble are probably the most comparable businesses to Altria, considering they all provide consumer products that could easily be described as recession-proof. However, with a higher dividend yield and a P/E of 13, Altria seems like a cheaper way to earn higher dividends.

Telefonica currently pays a higher yield than Altria. In part because of the struggling Spanish economy, its share price has been beaten down over the last few months, leaving it at a desirable 9.4 price-to-earnings multiple. With 65% of its revenue coming from outside of its home country, Telefonica still seems set to boost revenue and gain market share in Latin America.

These days, the words "mortgage-backed" or "collateralized-debt" typically strike fear in the minds of investors. However, real estate investment trust (REIT) Annaly Capital Management, which pays a whopping 15.2% dividend, usually has the opposite effect. Despite a real estate bubble and depressed housing prices, Annaly has been able to earn 20% annual gains over the last 10 years -- no easy feat at all.

Kinder Morgan is a Master Limited Partnership (MLP) that specializes in the transportation and service of natural gas. Although somewhat exposed to the volatilities of the energy sector, Kinder Morgan operates heavily with take-or-pay contracts, meaning its customers either accept its product or pay a penalty. This helps Kinder Morgan sustain relatively stable cash flows, and in turn helps them dish out that sweet 6.3% dividend.

The Foolish bottom line
All of the companies mentioned above have great traits as dividend payers, and all have proven themselves over time. However, we all know that past success is never a definitive indicator of future performance. What we do know is that Altria offers a product -- albeit a controversial one -- that consumers seem all too happy to keep consuming, no matter what the price. I think that gives this company a distinct competitive advantage, which might just be why Altria shines above all the rest.

What do you think -- is Altria the best dividend stock there is, or do any of the companies above offer something greater? Sound off in the comments box below!

Jordan DiPietro owns shares of Telefonica. Unilever is a Motley Fool Global Gains selection. Automatic Data Processing, Procter & Gamble, and Unilever are Motley Fool Income Investor recommendations. The Fool owns shares of Procter & Gamble. Try any of our Foolish newsletters today, free for 30 days. The Motley Fool has a disclosure policy.


Read/Post Comments (28) | Recommend This Article (80)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On July 13, 2010, at 4:26 PM, hldboo wrote:

    PMI is probably a better bet in the long run. It doesn't fit your screener because it hasn't the history as a separate entity, but one might say it shares Altria's history. I am long Annaly and I think it's a great play right now, but I will probably dump it when Ben gets around to raising rates.

  • Report this Comment On July 13, 2010, at 4:29 PM, DrRonPaul4Prez wrote:

    NLY and KMP are inflating their shares, so I'd shy away from those ones.

  • Report this Comment On July 13, 2010, at 6:32 PM, cuculan wrote:

    I owned Altria until recently but dumped it for many important reasons. Firstly according to one source it's sales, income and dividend rate have all decreased over the past 5 years. Secondly it's Free Cash Flow is practically zero, it's payout ratio is over 80%, and worst of all it is swamped in debt, which is now approaching 3 times equity. So, while the dividend is good, it's financials remind me very much of Greece before it collapsed?

  • Report this Comment On July 13, 2010, at 6:45 PM, AnotherNavyFool wrote:

    Jordan,

    I agree with you that the numbers for MO make for a compelling case to buy the stock, but this one of the few areas I have decided to draw a line in what I can invest in and still like what I see in the mirror.

    I have watched my father-in-law endure TWO lung transplants (partly due to smoking, but also his job choice as a firefighter), my father suffer an embolism aggrevated by decades of smoking, and grandparents who, while living into their late 70s-early 80s, lost unknown years with my kids due to smoking related illnesses and complications. My wife is allergic to the smoke and I never liked being around it for the years growing up with smoking parents and the time I worked as a bartender. I have seen too many people in the service suffer disfiguring cancers and damage themselves because of an addiction to tobacco.

    Don't get me wrong, I am not one of those people who will tell others they cannot smoke (just not in public places, please, depriving me and my family of our choice NOT to smoke). I just cannot support a company whose product is nothing but destructive, even when "used as recommended."

    I differentiate from other "sin" stocks or companies that make "dangerous" products through the fact that they can be used responsibly with no damaging effects. I like to drink, I enjoy shooting, and have even gone into a casino on occassion. All those activities, if done to excess or irresponsibly, can have lethal consequences. Yet, they can also be enjoyable when done responsibly and in moderation.

    I am not going to limit the stocks I buy based on the fact the company's products can be lethal. Legal drugs, fast food, and vehicles could easily fall into that category. The difference here is that all those products can be enjoyed safely. The same is not true for tobacco - no matter how it is used, it is destructive and causes many unwanted side effects and costs to the individual, people around them, and society.

    The comment on it being something people do not cut back on during tough economic times simply speaks to tobacco's addictive nature. While the same can be true for booze (having a family member who was an acoholic showed me that first-hand), it can be used responsibly and pleasurably without being destructive.

    As with all products like these, it comes back to personal responsibility - sadly, something we seem to be lacking more and more in our society (you listening up, Lohan?). If we use products responsibly, in moderation, they can make life more enjoyable. If not, we end up obese, diseased, addicted, and possibly dead - or worse, hurting others and an avoidable financial burden to society. Unlike the other products that CAN be destructive, tobacco is ALWAYS destructive - slowly sapping your health and wealth, no matter how moderate the use.

    Tobacco has NO upside - except for those who choose to invest in it, which I respectfully decline to do. I can make my money elsewhere, and even if it's a little less, I will breathe easier for it.

    -AnotherNavyFool

  • Report this Comment On July 13, 2010, at 8:17 PM, richie54 wrote:

    Despite all the social ills associated with tobacco and alcohol, this is one gem of a company since the mid-1950"s.

    Very well-run and well-managed, hence the stock symbol MO (from the latin "modis operandi").

  • Report this Comment On July 13, 2010, at 8:34 PM, plange01 wrote:

    annaly is the best dividend stock and take a look at another of its companys...cim a even larger dividend!

  • Report this Comment On July 13, 2010, at 8:39 PM, Turtle2090 wrote:

    Surprised that UGI didn't make your cut.

  • Report this Comment On July 13, 2010, at 8:49 PM, vgaymer wrote:

    Thank you anothernavyfool; I couldn't have said it better.

    I really don't think people grasp just how prevalent and deadly lung cancer is, at least I HOPE it's because of ignorance they support tobacco companies.

    http://www.cdc.gov/cancer/lung/statistics/index.htm

    And those statistics are just for lung cancer, not other cancers such as oral cancer associated with smoking and tobacco use, nor does it include cancers where smoking is a more minor risk factor nor include other diseases such as emphysema associated with smoking.

    I'll stick with an ADP thank you. UL and TEF look intriguing though.

  • Report this Comment On July 13, 2010, at 11:13 PM, Superdrol wrote:

    I'm not keen on the constant lawsuits in the tobacco industry and potential Government regulation. I did at one point own altria but I like Telefonica the most out of the group n

  • Report this Comment On July 14, 2010, at 7:48 AM, landoncz wrote:

    @ hldboo -- Do you mean PM, not PMI? I would suspect that PM didn't make the list because it's dividend is not quite so large?

  • Report this Comment On July 14, 2010, at 12:39 PM, mountain8 wrote:

    "...especially on discretionary products."

    Cigerettes are not discretionary products any more than cocaine is. Smokers will cut the food budget before they'll pass the cigerettes.

  • Report this Comment On July 14, 2010, at 7:24 PM, TMFPhillyDot wrote:

    @AnotherNavyFool,

    You are definitely right -- everyone has to invest individually, and when it comes to "sin" stocks, you can only buy what you feel comfortable with.

    Thanks for the comment.

    Foolishly,

    Jordan (TMFPhillyDot)

  • Report this Comment On July 15, 2010, at 4:51 AM, Mr1Sinatra wrote:

    smokers know they shouldn't smoke, but in america you can smoke, drink a beer, gamble, etc... as long as the gov't gets their cut, ...at least for now unless liberals get the nanny state they so badly desire.

  • Report this Comment On July 15, 2010, at 9:46 AM, Doris411 wrote:

    @cuculan,

    You are sensible to look at the payout ratio. I wish this information had been included in the tables in the article. It makes a huge difference!

    I also agree with AnotherNavyFool, but really, the payout ratio is reason enough.

    By the way, richie54, Altria's ticker of MO is from the previous company name of Philip MOrris, not some contrived Latin abbreviation. But you already knew that, right?

  • Report this Comment On July 16, 2010, at 12:49 PM, RPenCo wrote:

    Ben Franklin is quoted as saying that there are two certainties, death and taxes. Altria seems to still be profitable offering both.

    As much as the profit motive is attractive, I still can't put my money into tobacco.

  • Report this Comment On July 16, 2010, at 2:23 PM, exeter17 wrote:
  • Report this Comment On July 16, 2010, at 2:36 PM, billqpgmr wrote:

    Those of you concerned about the validity of owning MO because it is a 'SIN' stock, should be aware that it is 85% institutionally owned...which means that unless you are sticking to investment vehicles that claim to avoid such stocks, you probably DO own some shares indirectly.

    MO was one of the first stocks I bought, even before I signed on with the Income Investor service, and I've been pleased with the results.

    PM, mentioned above, is Phillip Morris International - split off, I think, to protect that portion of the company from US lawsuits.

    Both companies have performed well over time.

    I also own NLY, purchased when the Income Investor pointed it out to me...and I hung on through bad times when the service suggested it be sold. I'm very happy I did.

    I also own P&G, and a lot of others.

    Actually, I think my favorite picks to date, though, were BPT (prodhoe bay trust) and PVX (provident energy trust, a canadian ADR) - PVX is paying about 8% per year, compounded monthly with dividend reinvestment, and BPT is a bit over 9. As oil producers, their price tracks to oil prices, to some extent, and the yield is great.

  • Report this Comment On July 16, 2010, at 3:05 PM, sapereaude1 wrote:

    I wouldn't want anyone living next to me who invested in Altria. They'd probably kidnap local children and sell them to a pedophagic butcher. Don't invest in amoral corporations that make money peddling poison.

  • Report this Comment On July 16, 2010, at 3:55 PM, Gezzer80 wrote:

    Mo is a good stock ,.a good payer.,.Its a personal decision people make to use tobacco..If they choose it who am I to say they are wrong ..Somewhere personal responsibility has to be accepted..If it makes money I'm for it..

  • Report this Comment On July 16, 2010, at 4:20 PM, mustang28027 wrote:

    Both y parents passed away due to smoking, my dad from a heart attack and then later cancer, and my mom from a stroke. I dont smoke, I HATE it. I HATE Altria. But, I DO INVEST in it... because I want them to pay me for the loss that I have had.

    It's a vicious cycle... but I will invest in sin stocks, and then in healthcare stocks. They both fuel each other... and I can make money on them both.

  • Report this Comment On July 16, 2010, at 5:03 PM, bmc007 wrote:

    I have shares in both NLY (Annaly Capital management) & CIM (Chimera Investment Corp.) and have been picking up some juicy dividends for awhile now.

  • Report this Comment On July 16, 2010, at 6:04 PM, goldnail wrote:

    I too like nly... and own ANH as well;

    Look at PVG and PBT... energy delivery "toll booths"

    Avery Dennison Preferred A has been terrific, w/ div still around 9-10% and lots of upside to the $40 face value which is discounted by 20% to the $50 face of the preferred documents. Mandatory call date is November of this year at $50.

    I did well getting some BofA preferreds when they were down 75-80%. They hover between 7-9%.

    Then again... Verizon yield huge when it drops.... like today, with quite a potential upside coming in January... and if not, it's not going any lower, and 7% ain't bad

  • Report this Comment On July 16, 2010, at 6:10 PM, sebes2 wrote:

    AnotherNavy -- Don't forget you are not investing in the company if you buy the stock -- you are exchanging ownership from a previous owner. Once owned, you share in the profits that will be made whether you are an owner or not. Paying joe blow for some of his stocks doesn't support the production of a single cig.

  • Report this Comment On July 17, 2010, at 10:06 AM, Philinbos wrote:

    Long term the Govt. will put tobacco cos out of business either thru taxes or regulation. They have recently out-lawed shipping them to consumers... One step at at time the business of tobacco is doomed. Even as a smoker, for me, the dividend reward does not meet the risk- There are safer investment alternatives.

  • Report this Comment On July 17, 2010, at 2:05 PM, philkek wrote:

    Thanks fellow fools for all your points of view here. Of the many stocks noted here I have only owned shares of MO. I liked the MF advice about buying four or five great companies with good dividends at the time I bought it. MO paid off well for me until I sold it. I will follow MF advice about doing your own fundamental research before investing more money into any of these stocks mentioned here. They all sound good but careful analysis will help make more educated decisions to buy, sell, or hold. Fool on for profits.

  • Report this Comment On July 19, 2010, at 4:46 PM, edwilbur wrote:

    Altria may be the best dividend stock but given that Altria produces products that lead to misery and eventually death, I am sure I can find other high dividend paying stocks I would rather own. Having seen the pernicious affects of smoking first hand in my own family, the notion of buying Altria stock is really a nonstarter for me.

  • Report this Comment On July 19, 2010, at 5:38 PM, videoone1 wrote:

    I have had the upper 40% of both lungs removed because of a 30 year cigarette habit (which I terminated 20 years ago). Even so, it's amazing how many people confuse SUPPORTING a company (by buying its products) with sharing in its profits (by buying its stock). A pretty emotional topic with a lot of people, but I would counsel all to beware of using emotions to guide your stock investments. You can lose an amazing amount of money doing so.

  • Report this Comment On December 27, 2010, at 7:29 AM, Johnexo wrote:

    The basic materials sector is not known for high paying dividend stocks (exception would be Southern Copper (SCCO) at roughly 6%). However, I think this sector could show some growth in a regular investment portfolio.

    http://www.guidetoinvest.net/best-dividend-stocks.html

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