Income investing can be an excellent strategy for investors seeking to make their investments work for them by generating cash flow. But yield-oriented investors need to be careful when picking their stocks. This is because many high-yield investments pay unviable dividends that could be cut at any time.
Here are two proven dividend payers that could help investors build a portfolio of their own that throws off huge passive income.
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1. Altria Group: A Dividend King paying huge dividends
Consumers likely have never heard of Altria Group (MO 1.91%), but tens of millions of Americans regularly purchase its products. The company's product portfolio is led by the Marlboro cigarette brand. Marlboro holds an industry-leading 42.5% share of the U.S. cigarette market, which is greater than the market share of the next 11 brands combined. Altria Group also owns the Copenhagen moist snuff tobacco brand and the on! oral nicotine pouch brand.
The company has been able to successfully navigate falling cigarette volumes for many years now. Due to the inelasticity of tobacco products stemming from their addictive nature, consumers who remained throughout the years have tolerated steady price hikes. This has pushed Altria Group's operating profit significantly higher over the past decade.
But the company is certainly aware that this isn't a sustainable winning formula. This is why the company has shifted gears to focus on its nicotine pouch brand called on! and entered into an agreement with Japan Tobacco to sell the reduced-risk product called Plume in the U.S. Analysts believe that this approach coupled with price hikes in its combustible (i.e., cigarette) business will deliver 4.6% annual earnings growth over the next five years.
Income investors will be thrilled by Altria Group's 8.5% dividend yield, which is fivefold greater than the S&P 500 index's 1.7% yield. And with the dividend payout ratio poised to come in around 75% in 2023, investors can be sure that the company's 53-year dividend growth streak can continue in the years ahead. Yield-hungry investors can scoop up shares of Altria Group at a forward price-to-earnings (P/E) ratio of 8.8. This is well below the tobacco industry average forward P/E ratio of 12.1, which builds a margin of safety into the valuation.
2. British American Tobacco: A robust next-gen product portfolio
Like Altria Group, British American Tobacco (BTI 0.80%) possesses a stacked product portfolio. On the combustible side, the company's products include Camel, Newport, and Pall Mall. But what could be the real feather in British American Tobacco's cap in the future are the non-combustible brands like Vuse vapor and Velo nicotine pouches.
This is because while the combustible consumer count is gradually shrinking, the non-combustible business is rapidly growing. British American Tobacco's non-combustible consumer base surged 23% higher year over year to 22.5 million in 2022. At this pace, the company is more than positioned to reach its target of 50 million non-combustible product consumers by 2030. That's why analysts believe that British American Tobacco's earnings will rise by 11.8% each year for the next five years.
Paired with a projected forward dividend payout ratio of 55.4%, this makes the stock's 7.9% dividend yield secure. And at a forward P/E ratio of 7.6, shares of British American Tobacco are trading at a no-brainer valuation for investors seeking a steady stream of passive income.
