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Dividend investors count on stocks that have a solid dividend yield and a track record of growing their quarterly payouts consistently, and Altria Group (MO 0.74%) has delivered on both scores for decades. Over that time, shareholders have seen the tobacco giant successfully overcome obstacle after obstacle to its growth, and they've reaped the rewards of strong total returns. Yet now, Altria's greatest long-term strength could be the biggest danger for shareholders who rely on its dividends. After the company took away what had been a huge margin of safety, Altria investors are now counting on its ability to avoid black-swan events, and any failure could prove disastrous.

Why dividend investors gave Altria a wide berth in the past

Altria's dividend-stock reputation dates back more than 50 years, but the company has gone through ups and downs over that time. Altria's dividends in the 1970s were in the 2% to 4% range, rising steadily throughout the decade. By the 1990s, Altria's dividend yield had risen to a range roughly between 3% and 6%, and many investors saw the stock as a slow-growth bond alternative whose share price moved as much in line with the bond market as with the stock market.

However, in the late 1990s and early 2000s, Altria suddenly saw its dividend yield soar. The threat of huge losses from litigation sent the stock's price plunging, yet Altria didn't hesitate to keep paying out regular dividends. The spinoff of Kraft also heightened the risk involved in the remaining Altria, leaving the company even more concentrated on tobacco products as the primary source of its revenue and profit. Fears of billion-dollar jury verdicts made some believe that Altria could go out of business entirely if it suffered a major loss in litigation.

Image source: Altria.

The key for Altria shareholders who stayed the course is that they received a huge risk premium in exchange for taking on this risk. When yields climbed to 8% or more on the stock, income investors who were willing to gamble felt that they were getting fairly compensated for the litigation risk.

Dodging the bullet

As it turned out, however, Altria has thus far managed to avoid the worst-case scenarios of its potential legal liability. The company hasn't won every single case waged against it, but it has scored some key victories that have closed the door to potentially catastrophic class-action lawsuits against it.

The result for Altria investors has been a big win. Not only did they get to keep the rich dividends the company paid during that time of trouble, but they also enjoyed huge share-price gains in the wake of positive decisions in the courtroom. That win-win scenario has delivered extremely strong total returns to Altria shareholders, working out to an average of 20% annually over the past 15 years.

What lies ahead for Altria dividend investors?

Unfortunately, what has been good for existing longtime Altria shareholders isn't necessarily as good for those looking at the stock now for the first time. Despite ongoing dividend growth, Altria's share price has climbed so high that its dividend is now relatively low. A roughly 3.25% yield is nothing to sneeze at in today's market, but it's fairly low in the context of Altria's history.

Moreover, the combination of high share prices and low yields takes away the key risk premium that Altria shareholders enjoyed for a long time. Altria's litigation risk might be far less than it was 10 or 20 years ago, given how many legal issues have already gotten resolved. Yet the company still faces plenty of risks on the regulatory and consumer advocacy front. High taxes, ongoing anti-smoking advertising efforts, and restrictions on smoking at the state and local level will continue to hurt Altria. These pressures are generally incremental rather than threatening the entire cigarette business all at once, but they still represent a headwind that makes the current low dividend yield seem like less compensation for risk than Altria shareholders have gotten in the past.

Altria has a long history of strong performance, and it has survived past difficulties in innovative ways. However, after such strong long-term returns, Altria shareholders need to ramp down their expectations for the future and acknowledge that the best of times they've enjoyed for so long -- in the form of high dividend yields and share-price appreciation -- might finally have come to an end.