Stocks are in a tailspin with the S&P 500 down a dizzying 24% year to date. This market volatility presents unique challenges if you are planning for retirement. That said, sustainable dividend-paying stocks like Philip Morris International (PM 0.21%) and Vector Group (VGR -0.64%) can help your portfolio weather the storm.
Philip Morris International
According to Business Insider, tobacco has been America's top-performing industry for more than 100 years, turning $1 invested in the year 1900 to a staggering $6,000,000 by 2015. And while the industry's days of breakneck growth are behind it, innovative companies like Philip Morris International can continue generating value for investors by adapting to the increasing health consciousness among consumers.
Philip Morris is going all in on its pivot to smoke-free and reduced-risk tobacco products, which can help the company reinvent itself as a safer alternative to rivals. As of the second quarter, these items make up roughly 30% of revenue. And the company plans to bring that percentage above 50% by 2025. To help reach this goal, management has embarked on a series of acquisitions -- including a yet uncompleted $16 billion bid for smoke-free oral tobacco (snus) maker Swedish Match, which could help diversify Philip Morris' product mix and expand its distribution network.
Philip Morris has also acquired full-fledged healthcare companies like Vectura (purchased for $1.45 billion in 2021). Vectura specializes in inhalent-based medications and could help its new parent company develop safer ways to administer nicotine products.
For income investors, Philip Morris is a great option because of its generous return of value to shareholders. With a dividend yield of 5.8%, it trounces the S&P 500's average of just 1.7%. The company also offers a generous stock buyback policy with up to $7 billion in share repurchases authorized for the three years following the second quarter of 2021.
As an addictive product, tobacco is recession-resistant. Consumers will still need their fix -- even in a challenging economy. Vector Group takes the industry's natural advantages a step further by focusing on the discount side of the market. The company's massive dividend and reasonable valuation are icing on the cake for investors.
Second-quarter earnings demonstrate the strength of Vector Group's business model in challenging economic conditions. Revenue jumped 15% year over year to $387 million, driven by strength in the discount tobacco business. Vector Group seems to be benefiting from persistently high inflation in the U.S. economy, which encourages consumers to buy cheaper cigarettes such as its Montego, Eagle 20's, and Pyramid.
These products are 50%, 30%, and 15% cheaper, respectively, than the leading premium brands, according to management.
With a forward price-to-earnings (P/E) multiple of just 7.7, Vector Group stock is also cheap compared to the S&P 500 average of 18. The company's low valuation has led to an abnormally high dividend yield of 9%. And at a cost of $63.3 million in the second quarter, the payout looks sustainable compared to the $211.2 million Vector Group generated from operating activities in the period.
Betting on stability
Philip Morris and Vector Group offer investors a great way to earn sustainable high yields in uncertain market conditions. But they achieve their safety in different ways. Philip Morris' investments in new technologies shield it from problems in any specific product line, while Vector Group's focus on the discount tobacco market makes it particularly recession-resistant. Both companies could have a place in a diversified investment portfolio.