Selecting investments that outperform can be a complicated process, but it doesn't have to be as difficult as many folks in the finance industry make it seem. Elementary-school arithmetic is enough to see how buying dividend payers is an easy way to build a successful stock portfolio.
During the 50 years between 1973 and 2022, dividend-paying stocks in the benchmark S&P 500 index delivered a 9.18% average annual return. Stocks that didn't pay dividends produced an average annual return of just 3.95% over the same time frame, according to Hartford Funds and Ned Davis Research.
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Cigarette smoking has been declining steadily for decades, but heavy marketing restrictions make it impossible to attack established brands. The price-raising power these companies get from their established brands and rising sales of new noncombustible products allowed them to steadily raise their payouts for decades.
In the U.S., cigarette sales volumes declined rapidly in 2023 because of competition with disposable vaporizers that are unauthorized by the FDA. A stock market worried about illicit vaporizers has knocked these stocks down so low that they offer dividend yields above 9% right now.
Here's why they look like no-brainer stock picks for investors who want heaps of dividend income with relatively little risk.
Altria Group
Altria Group (MO 0.85%) sells the leading Marlboro brand in the U.S., and that's not all. Its investment in Juul didn't work out, but its next attempt at cornering the e-vapor market could drive total sales to new heights.
NYSE: MO
Key Data Points
Last June, Altria acquired NJOY, the only pod-based e-vapor product approved by the Food and Drug Administration (FDA). With help from America's judicial system and government regulators, NJOY could be a big growth driver for Altria in 2024 and beyond.
Altria's legal team began flexing its muscles last October, with 34 suits against distributors and retailers of illicit e-vapor products in California. In December, the FDA stepped up enforcement of its ban on flavored e-vapor products by seizing 41 shipments of illegal e-cigarettes, in collaboration with Customs and Border Protection.
During the first nine months of 2023, Altria reported domestic cigarette shipments that fell 10.5% year over year. Higher prices for Marlboros and increasing sales of non-smokable products allowed the company to record revenue net of excise taxes that fell just 0.8% over the same time frame.
Improved margin and a reduced share count helped Altria report adjusted earnings that rose 3.3% during the first nine months of 2023. A bottom line that keeps on rising despite declining cigarette volumes gave the company confidence to boost its dividend payout by 4.3% last summer.
At recent prices, Altria stock offers a 9.5% dividend yield and the peace of mind that comes with 54 consecutive years of payout raises. It probably won't be the fastest-rising payout in your portfolio, but there's a good chance we'll see steady raises for at least a decade.
British American Tobacco
Shares of British American Tobacco (BTI 0.20%) offer U.S. investors a 9.3% yield at recent prices. The payments that American investors receive fluctuate with currency exchange rates, but the company has raised its dividend payment in British pounds every year since switching to quarterly installments in 2018.
NYSE: BTI
Key Data Points
With brands like Camel in the U.S. and Dunhill abroad, British American Tobacco's combustible cigarette volumes are declining at a slower pace than Altria's. The company still hasn't reported combustible volume from the second half of 2023, but in the first half, volume declined by 5.8%, which it easily offset by raising prices.
In the U.S., the FDA has been trying to ban the sale of menthol-flavored cigarettes for over a decade, and it's getting close. That doesn't bode well for U.S. sales of the company's Newport brand.
Luckily, new category sales are rising fast enough to offset declining cigarette sales once a long-awaited national menthol ban takes effect. British American Tobacco's e-vapor product, Vuse, is available in 59 markets and driving new category sales growth. New category sales rose 27% year over year in the first half of 2023. Thanks to continued strength from new products, management expects to report annual organic revenue that rose about 3% overall last year.
British American Tobacco reported $11.9 billion in free cash flow during the 12 months ended last June. That was nearly twice the amount necessary to make its last four quarterly dividend payments. That gives the company plenty of room for error as it deals with illicit e-vapor products and a potential loss of menthol cigarette sales in the U.S. market.
