Retirees and other income-focused investors must wade through an ocean of dividend stocks to find high-yield investments that can afford their lofty payout. The market won't pay as much for a stock with a suspect dividend. The lower share price creates a higher yield.
But some stocks, like Altria Group (MO -0.37%) and AT&T (T 1.02%), are household high-yielders known for their commitment to paying shareholders. The question today is: Which one can you trust with your money?
That doesn't necessarily mean one is in danger of cutting its dividend. Still, one offers more peace of mind and total returns upside.
Here is what you need to know.
Both companies dominate mature industries
When you look at the state of tobacco and telecommunications in the United States, there's not much to get excited about. Smoking rates have declined for decades, and almost everyone has a smartphone. However, each company enjoys high barriers to entry in their respective fields, limiting competition to those already there.
Altria is a nicotine products company most known for selling Marlboro cigarettes in the United States. Marlboro is America's most popular cigarette, with an estimated 42.1% market share. Altria also sells cigars, oral tobacco, and smokeless nicotine products, including electronic vapes, nicotine pouches, and heat-not-burn devices. The company also owns a 10% stake in Anheuser-Busch, worth roughly $12 billion today.
AT&T is the largest wireless carrier in America, with approximately 47% of the market. The company spent much of the past decade venturing into media and entertainment but formally abandoned that when it spun off those assets in 2022. Today, AT&T is back to being a dedicated communications company, headlined by its consumer wireless business, business services, high-speed internet, and landlines.
Can you trust Altria's 9.5% yield or AT&T's 6.6% yield more?
Both stocks offer investors more dividend yield than you'll get from most others. Altria is a Dividend King, a company that's raised its dividends for at least 50 consecutive years. That streak goes to show how strong its pricing power is. Altria has raised its prices to offset selling fewer cigarettes over the years.
AT&T cut its dividend as part of spinning off its media assets in 2022. Management wanted to free up more cash to pay down debt and invest in the business. That cut made AT&T's dividend more affordable at just 40% of cash flow. Meanwhile, Altria's 80% dividend payout ratio doesn't leave much more room.
MO Dividend Yield data by YCharts
Investors probably don't have to worry much about either company's dividend. Altria is firmly committed to its dividend and has the balance sheet to continue supporting the payout while expanding its business beyond cigarettes, which currently contribute most of its profits. It might seem hard to trust AT&T after its recent cut, but its dramatically improved payout ratio means AT&T can both pay its dividends and pay down its debt.
I'll call this a draw since Altria's higher payout ratio has a notably higher yield to compensate investors for tolerating that added risk.
One has more long-term upside
Ultimately, Altria stands out when looking at the big picture. For starters, you're getting an impressive 9.5% dividend yield. Additionally, analysts expect nearly 4% in annual earnings growth over the long term, compared to virtually zero growth from AT&T. Not including any valuation changes, that's 12% to 13% total returns compared to just 7% from AT&T.
MO EPS LT Growth Estimates data by YCharts
Why does AT&T lag? Look at each company's balance sheet. AT&T carries 3.1 times as much debt as it makes in earnings before interest, taxes, depreciation, and amortization (EBITDA), compared to Altria's 2.2 times. Altria also could cash in on its stake in Anheuser-Busch and significantly improve on that if it chose.
Perhaps AT&T will continue making progress on paying down debt and its growth will improve. Remember, interest on debt takes away from earnings. But until then, it's hard not to see the clear advantage a leaner Altria has, paying a superior dividend and serving up earnings growth.
