Dividend stocks are everywhere, but many just downright stink. In some cases, the business model is in serious jeopardy, or the dividend itself isn't sustainable. In others, the dividend is so low it's not even worth the paper your dividend check is printed on. A solid dividend strikes the right balance of growth, value, and sustainability.
Today, and one day each week for the rest of the year, we're going to look at one dividend-paying company that you can put in your portfolio for the long term without too much concern. This isn't to say these stocks don't share the same macro risks that other companies have, but they are a step above your common grade of dividend stock. See last week's selection.
This week, we'll take a look Philip Morris International (NYSE: PM ) and I'll show you why it could be a smoking hot dividend to grab.
U.S. tobacco has been smoked
It's no secret that I'm hypercritical of the tobacco sector. Part of that has to do with my own biases toward smoking, but there are plenty of logical reasons not to feel confident about the future of the sector.
For starters, the Food and Drug Administration and the Center for Disease Control and Prevention are doing anything within their power to ensure that fewer people smoke. Earlier this year, the CDC unveiled a three-month-long, $54 million advertising campaign targeted at getting 50,000 people to stop smoking, which it figured would save $170 million in annual health-care costs over the next three years. In similar fashion, the FDA will soon be requiring tobacco companies to report the chemical quantities of 20 cancer-causing agents found in cigarettes.
In sum, the U.S. government and its agencies are making smoking as unglamorous as possible and doing everything they can to weaken sales; and not to rain on big tobacco's parade, but it's working. Within just the past year, Altria (NYSE: MO ) and Reynolds American (NYSE: RAI ) have announced layoffs totaling 15% and 10% of their respective workforces in response to weakened demand.
Another key point to tobacco's woes is that much of its growth in recent years has come from price increases. Between that and weak wage growth, consumers are plum tapped out and turning away from premium brands in favor of lower-margin discount brands. Lorillard's (NYSE: LO ) Newport brand has been one of the few exceptions to this rule, having significantly outperformed Altria's Marlboro and the rest of its peers. However, that doesn't mean discount tobacco companies are safe. Vector Group (NYSE: VGR ) , known best for its Pyramid, Liggett, and Grand Prix discount brands, reported an 8.4% decline in unit sales in the second-quarter.
Why everywhere else matters
So why bother with tobacco if there's such backlash against it within the United States? The answer is simple: Tobacco is a profitable and consistently high-margin cash stream within and beyond the United States -- and that's where Philip Morris International comes in.
Philip Morris holds the advantage of being one of the relatively few global-reaching tobacco companies. That doesn't mean it's absolved of legal risk, as it does face the negative impact of adorning graphic warnings on olive-colored cigarette packaging in Australia per a court ruling in that country. But overall, it faces few global legal challenges and has an insane amount of diversity, with its brands spread among 180 countries.
In Philip Morris' most recent quarter, both cigarette volume and total revenue fell slightly, but most of this was due to unfavorable currency exchange and the negative effect of the Japan earthquake in 2011. Make no mistake about it: Philip Morris' growth is targeted at the young and rising middle-class population in both China and India.
Smokin' hot dividend
Philip Morris may take heat for being at the butt-end of the tobacco sector when it comes to dividend yield, but it offers potentially the most stable dividend of the group, thanks to its diversification and relatively low payout ratio.
Better yet, earlier this week Philip Morris announced a 10% boost in its quarterly payout to $0.85 from $0.77. The move will boost the company's yield to nearly 4%. Have a look for yourself at how rapidly this dividend is expanding:
*Assumes quarterly payout of $0.85.
You might be compelled to take your chances with Altria, Reynolds American, or Vector Group in the U.S., which have yields in excess of 5% -- or in Vector's case, about 9% -- but you'll sacrifice having to deal with potential legal woes and you'll deal with payout ratios that are reaching a ceiling. Altria and Reynolds are paying out 80% and 89% of their earnings as dividends already. Vector may even need to consider a dividend cut, with a current payout ratio of 593%. Philip Morris, on the other hand, has a sustainable payout ratio of just 70% even after its latest dividend increase.
Just because I don't like tobacco, that doesn't mean I can't see the plain-as-day value in Philip Morris. With much of the U.S. market saturated, Philip Morris is in prime position to score countless new customers in Asia, including potentially the Middle East, and it may target Africa as well. Its broad diversification shields it from a perfect storm of legal trouble while its dividend gives income seekers more than enough to keep them satisfied. As I said, this is one smokin' hot dividend!
If you're craving even more dividend ideas, I invite you to download a copy of our latest special report, "Secure Your Future With 9 Rock-Solid Dividend Stocks," which is loaded with income-producing companies hand-selected by our top analysts. Best of all, this report is free, so don't miss out!