High-yield dividend stocks can be excellent passive income sources, but sometimes, high yields can be a sign of trouble. Take tobacco giant Altria Group (MO -0.24%), for example; the stock offers investors a whopping 8.3% yield, but why is Wall Street demanding such a high payout for owning shares?
Here are three reasons investors can tap into Altria's fat dividend with confidence.
1. Altria's resilient cash profits
Smoking has been a fading habit for some time now -- the annual total of cigarettes sold in the United States has fallen from 398 billion sticks in 2001 to 203 billion in 2020, a 45% decline. Since Altria owns Marlboro, the country's most popular cigarette brand, you might guess its exposure to this decline would mean less revenue.
But the addictive properties of nicotine have let tobacco companies like Altria steadily charge more for their products over time, offsetting the decline in cigarette volumes each year. The company has grown revenue by an average of 2.4% annually over the past decade. It's not eye-popping growth but impressive considering how much less product Altria ships these days.
Data by YCharts. TTM = trailing 12 months.
Meanwhile, Altria's become increasingly profitable, because it sells fewer products for more money. The company is converting 39% of every sales dollar into free cash flow, which totaled $8.1 billion over the past year.
Can Altria raise prices forever? Probably not, but the routine could last longer than you might think. The average price of a pack of Marlboro cigarettes in the United States in Sept. 2021 was $8.00, which seems like a lot until you realize smokers paid more than triple that in Australia.
2. A trusted history of dividend excellence
Most invest in Altria for one reason: With revenue growing about 2% annually, shareholders own the stock for its massive dividend. The company is a Dividend King that has raised the payout for 53 consecutive years. The yield is so high that investors only need minimal growth to generate total returns equal to the 10% the S&P 500 has historically averaged in a given year.
Data by YCharts.
The dividend is not only generous but safe as well. You can see above that the dividend payout ratio is roughly 80%. In other words, the company sends 80% of its cash profits to shareholders. The payout ratio is a little higher than you'd typically like in a company, but Altria is an exception. The cigarette business doesn't need much upkeep or investment, and you've seen how resilient the company has been over the years.
3. A $10 billion emergency button
If the most terrible scenario ever came true, and Altria's back was against the wall, there is still one more ace up the company's sleeve. Altria owns a 10% stake in Anheuser-Busch InBev, the world's largest beer company. With a market cap of $98 billion today, Altria's stake is worth just under $10 billion.
If Anheuser-Busch increases in value over the coming years, that's only more money for Altria. The beer giant has been financially troubled since a couple of mega-mergers over the past decade, but it could start to gain some traction after years of working on its balance sheet.
Altria would probably prefer to use that stake to help fund new products or strategic acquisitions to help build a post-cigarette business. Still, the company has that as a last resort if needed. In other words, Altria's 8.3% yield remains a trustworthy and attractive incentive to buy the stock.
