Inflation is a silent assassin of wealth, sapping the buying power of your dollars without you realizing it.
Investing in income-producing assets like dividend stocks can be a great way to combat inflation and keep your wealth-building journey on the right track.
Tobacco giant Altria Group (MO 1.26%) won't wow you with incredible growth or impress your friends looking for the next big thing. But Altria can be a safe harbor in a tumultuous market sea. Here's why.
NYSE: MO
Key Data Points
The resiliency of Altria
It's no secret that smoking cigarettes is bad for your health and a habit that's slowly faded over the past several decades. In the past 15 years, the smoking rate in America has declined from 20.9% of adults in 2005 to 12.5% in 2020.
Altria only sells its cigarettes and cigar products in the United States, so you'd think this would choke the business, preventing growth. However, the addictive properties of nicotine in tobacco products let Altria raise its prices just enough to grow a little bit each year.
Revenue has grown by an average of 2.3% annually over the past decade, while operating profits have increased by an average of 6.2%. Altria's smokeable product volumes shrink yearly, demonstrating the ability to raise prices steadily. Smokeable products contribute 88% of Altria's revenue, so growth isn't likely possible without this pricing power.
A massive dividend you can count on
Knowing how stubborn Altria's core business is, you can look at Altria's massive dividend with new appreciation. Altria pays investors a quarterly dividend, an annual sum of $3.60 per year, for a dividend yield of 8.2%.
Is it enough to completely negate the current inflation rate? No, but it's pretty close to doing that and comes with the potential upside of capital gains.
MO Dividend Yield data by YCharts
Better yet, inflation should eventually cool off, but Altria's raised its dividend yearly for the past 52 years, making it a Dividend King, and rarified air in the investing community. Just 43 other members of the S&P 500 have 50 or more consecutive dividend hikes.
The haters will say that a high-yield dividend like Altria's is often a red flag, and sometimes that's true. However, Altria's somewhat high, but still quite affordable 78% payout ratio funds the dividend with free cash flow. Even if a hypothetical disaster struck, Altria's sitting on a 10% stake in Anheuser-Busch InBev worth roughly $10.8 billion, an excellent financial safety net for the company.
Altria isn't perfect
If everything is so great, why has the stock underperformed the broader market over the past five years? Altria's not perfect; it's made mistakes, most notably its infamous $12.8 billion investment in electronic cigarette company Juul in 2018, which is now essentially worthless after the FDA blocked it from selling in the United States.
MO Total Return Price data by YCharts
But the stock's paid for that blunder; shares now trade at a price-to-earnings ratio (P/E) of 9.1, well short of its decade-long median P/E of 17. One could argue that the stock's valuation already reflects the negativity and pain of the Juul debacle.
Investors shouldn't count on Altria to make them rich like others in past generations, and Altria still needs to show its long-term outlook goes beyond its slowly dying core business. At the same time, there might not be a more dependable income-producing stock right now than Altria, and that's worth something in this chaotic market.
