If all you did was look at dividend yield, then tobacco giant Altria's (MO -0.37%) 9.2% yield would easily win out over real estate investment trust (REIT) Realty Income's (O -0.17%) comparatively small 5.5%. But investors looking to create decades of passive income shouldn't stop there because there's huge differences between these two companies.
Here's a quick look at why conservative investors will likely be much happier with the smaller yield.
Very different businesses
Altria's primary division, which makes up around 90% of its top line, sells what it calls smokable products. While that's a fancy way of saying cigarettes, with the company owning the U.S. rights to the juggernaut Marlboro brand, it also makes cigars. In short, Altria is a consumer staples company.
Realty Income, meanwhile, is a real estate investment trust that owns rental real estate using the net lease model. A net lease requires tenants to pay for most property-level operating expenses. Around 77% of the REIT's assets are retail properties, which are fairly similar in nature and relatively easy to buy, sell, and release. About 15% of its properties are industrial assets and the remaining bit falls into a broad "other" grouping, which includes vineyards and casinos.
Normally, comparing a consumer staples company to a REIT would be kind of pointless, since they are very different businesses. However, these are both stocks that dividend investors find attractive and a comparison is actually worthwhile.
Both have attractive dividend stats
As noted, Altria's yield is an eye-popping 9.2%. The dividend has been increased annually since 2009, or a bit more than a decade. The average increase over the past 10 years was around 7.5%. Those are not bad statistics, but Realty Income has a good dividend history, too. Its dividend yield is lower at 5.5%, but it has been increased annually for 29 consecutive years.
And while the average increase over the past decade was a more miserly 3.8%, that's probably more than offset by the dividend cut that Altria investors had to suffer through. In fact, Altria's dividend took more than a decade to return to the pre-cut peak level achieved in 2008. The risk of another cut is what investors need to keep in mind here.
MO Dividend Per Share (Annual) data by YCharts
The future is not equally bright
Most investors probably already know the problem facing Altria's cigarette business. Still, it is important to explain just how dire the situation is, with the volume of cigarettes sold in the third quarter down 11.6% year over year. That's not a fluke; the business has been in a steep decline for years.
To put a number on that, in the third quarter of 2018, five years ago, Altria sold 29.7 billion cigarettes. In the third quarter of 2023, that number had fallen to just 19.3 billion, a 35% drop. That's not a sustainable trend, though Altria has been able to offset the volume decline by charging its remaining customers more. That can only go on for so long before a tipping point is reached and the business starts to decline at a more rapid clip.
Realty Income, with a portfolio of over 13,000 properties, is by far the largest net lease REIT. It has to make huge investments in new assets each year to grow its business, which is part of the reason the dividend growth is so slow. This is a tortoise, not a hare. But there's no reason to believe that it can't keep growing -- note that it's in the process of buying one of its smaller peers, Spirit Realty.
Finding new ways to grow
The last point here is the one that is probably the most important. Altria needs to find a new product to sell if it doesn't want to bleed its cash cow cigarette business to death. So far it has tried vaping products and marijuana, and both have blown up in its face, leading to massive write-offs. Management is once again trying vaping, even as these products face increasing scrutiny.
It is hardly clear that Altria will be able to achieve this time what it has failed to do before. And even if it does find a new product to sell, the revenue from that business may only offset the ongoing declines in the cigarette operation. The highly uncertain future here should scare away most long-term dividend investors.
Realty Income, on the other hand, has been spreading its reach into new areas. It has started to buy properties in Europe, it entered the casino sector and indoor farming, and it has also begun to lend money to select customers. That's on top of looking to exploit new property types that fit within its existing retail focus, like medical retail, among others.
While not all of equal value or desirability, each adds a lever for future growth. And that's on top of acting as an industry consolidator, as noted above. While Realty Income needs to invest a lot of money to grow, it has so far been quite successful at doing so.
The risk is long term in nature
There's no reason to believe that Altria is on the verge of a dividend cut. In fact, the dividend was increased again in the third quarter of 2023. But if you take a longer-term view of the situation, the risk of a cut is probably higher than most conservative investors would be willing to accept based on the steady volume decline in the company's most important business line.
Realty Income, on the other hand, has a solid business that is still expanding and it is finding even more ways to invest profitably for the long term. Conservative income investors will likely find that story more appealing despite the lower yield.
