The big draw for investors with Altria (MO -0.37%) today is the stock's huge 9.4% dividend yield. But a big yield sometimes signals big risks, which is the case for this consumer staples stock today. And why most dividend-focused investors will be better off owning a far more boring company like Realty Income (O -0.17%) despite its lower 5.3% dividend yield.
Here's what you need to know.
Altria's got some very bad math going on
Although Altria can boast that it has increased its dividend annually for years on end, income-focused investors need to look past a company's dividend streak when making an investment decision. When you do that here, there's one big trend that stands out: cigarette volumes. In the third quarter of 2023, volume in the company's most important business fell 11.6% year over year.
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That's a terrible number. If it were just one quarter, maybe investors could overlook it as a hiccup. But this is a long-term trend. To put some numbers on that, cigarette volume was 19.3 billion in the third quarter of 2023 compared to 29.7 billion in the third quarter of 2018. Clearly, Altria's cigarette business is in a long-term downward trend.
It has been offsetting that volume decline with price increases, which allowed it to keep growing the dividend. But that can go on for only so long before the company hits a tipping point and price increases start to cause people to quit smoking faster than price increases can offset. The company has failed multiple times to find a product to replace cigarettes, and Altria's high dividend yield is really a reflection of the fact that Wall Street is worried about its long-term future. And that concern seems justified.
Realty Income keeps on giving
At the other end of the spectrum is Realty Income, which continues to expand its business as it increases its dividend. This real estate investment trust (REIT) has grown in multiple ways over the years. Not only has it bought individual properties, but it has acquired portfolios of assets, and it is even consolidating its net lease niche (a net lease requires the tenant to pay for most property-level expenses). On that last front, it recently agreed to buy Spirit Realty (SRC), which will expand its property portfolio from roughly 13,100 to over 15,100.
Realty Income is already the largest competitor in the space, and its growth enables it to more easily tap capital markets to fund its expansion efforts. Add in an investment-grade credit rating, and there's a strong financial foundation here. Realty Income's 29 consecutive annual dividend increases certainly make it stand out against a company like Altria, with a business that is slowly withering away.
To be fair, Realty Income does come with some caveats. For example, given that the REIT is more than twice as large as its closest peer, it has to make a lot of deals to grow. That's just a function of its size and means that slow and steady is the likely course. This is pretty much what investors have gotten over the long term: The dividend growth rate over the past 29 years was just 4.3% a year on an annualized basis. In other words, Realty Income won't be an exciting stock to own, but it will likely keep the spending power of your dividend on par with, or slightly ahead of, the rate of inflation growth over time. That's not bad at all if you are trying to live off the income your portfolio generates.
Try not to buy dividends that could go away
If you are a dividend investor trying to supplement your retirement with income stocks, you need to avoid getting drawn into a yield trap. Yes, the yield you buy might be huge, but if the dividend isn't sustainable, you are only buying yourself heartache down the line. Given the trends in Altria's core business, its high yield comes with huge risks. This is why a boring and reliable dividend stock like Realty Income, also an industry leader, would likely be a better choice despite its lower yield.
