Given Altria's (MO -0.12%) dividend, one can forgive casual observers for assuming Altria's cash yield is a dividend trap. The yield currently comes in at 9.1%, more than five times the average S&P 500 dividend return of around 1.75%.

Nonetheless, while Altria is a troubled stock on some levels, its more prominent issues do not relate to its finances. Considering the continuing long-term growth of its payout, income investors could profit from taking a position in this tobacco stock.

The state of Altria and its payout

Since the Surgeon General's report on the dangers of smoking came out in 1964, both governments and social groups have campaigned against tobacco. Moreover, Altria has faced numerous lawsuits as medical professionals tied millions of deaths to tobacco use. Settling these cases cost the company billions of dollars over the last few decades.

However, none of these challenges prevented Altria from offering more passive income. After approving a 4.4% dividend increase earlier this year, Altria's annual payout now stands at $3.76 per share.

Also, its annual payout has risen in 30 of the past 33 years. The only reason it is not a Dividend Aristocrat is that it cut its dividend in 2007 and 2008 amid the spinoffs of Kraft (now a part of Kraft Heinz) and Philip Morris International.

But despite the increases, Altria's payout is showing some signs of strain. It spent about $3.3 billion on dividends in the first half of 2022. This exceeded the $2.5 billion in free cash flow generated for the year. Although the company holds almost $2.6 billion in cash, the size of the dividend may be placing some strain on the company.

Still, the dividend has arguably become the primary reason to own the stock. Over the last five years, Altria has dramatically underperformed the S&P 500, and also experienced significant multiple expansion. It currently trades at an earnings multiple of 42, well above the P/E ratio of 8 from five years ago. And this multiple expansion has occurred over a time when smoking rates have declined. That rate stood at 12.5% in 2020, down from almost 21% in 2005.

How Altria profits

While that decline may hurt Altria, the addictive nature of its product has given the company pricing power despite declining use. The average price of a pack of cigarettes has risen to $8 per pack, according to the World Population Review. Moreover, the St. Louis Federal Reserve estimates 9% inflation for the tobacco industry over the last year.

Altria has also worked to diversify its business. Its 10% stake in Anheuser-Busch InBev gives it roughly a $9.4 billion position in the producer of Budweiser and other popular alcoholic beverages. Also, while a 45% stake in Cronos Group brought losses recently, analysts at Grand View Research forecast a compound annual growth rate of 26% for the global cannabis industry through 2030. That rate of increase and Altria's expertise in a similar industry could make this a profitable partnership.

Admittedly, not all diversification efforts have succeeded -- Juul faces ongoing legal challenges with the Food and Drug Administration. But if the company can continue to diversify, it should bolster Altria and its rising dividend.

Making sense of Altria's dividend

Altria has defied the odds and become one of the more powerful dividend growth stories in American business today. Indeed, the stock appears pricey, and its dividend has become more of a burden recently.

Still, its long track record of payout hikes bodes well for income investors. As the company diversifies into new revenue streams, it should continue to provide a lucrative source of income for dividend investors.