Altria (MO +0.07%) is often considered a stable dividend investment for conservative investors. It's the largest tobacco company in America, it generates stable earnings growth, it's raised its dividend every year since it spun off Philip Morris International in 2008, and it pays a high forward yield of 8.5%.
Altria's high yield might look tempting as the potential for interest rate cuts makes CDs, T-bills, and other fixed-income investments look less attractive. Its stock also looks dirt cheap at 9 times forward earnings.
But despite those strengths, I wouldn't touch Altria with a 10-foot pole because its core market is stuck in a secular decline.
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From 2018 to 2023, Altria's annual cigarette shipments declined from 109.8 billion sticks to 76.3 billion sticks as more Americans gave up smoking. Its flagship brand, Marlboro, also saw its retail market share drop from 43.1% in 2018 to 42.1% in 2023. To offset that pressure, Altria repeatedly raised its prices, cut costs, and bought back more shares to boost its earnings per share (EPS).
But over the long term, I believe that strategy will collapse unless Altria meaningful diversifies its business away from cigarettes. So instead of investing in this tobacco giant and hoping that it sells more e-cigarettes and nonsmoking products to offset those losses in the future, I believe it's smarter to invest in the classic income stock Realty Income (O +0.95%).
NYSE: MO
Key Data Points
What does Realty Income do?
Realty Income is one of the largest real estate investment trusts (REITs) in the world. REITs buy up a lot of properties, rent them out, and split the rental income with their investors. To maintain a favorable tax rate, they need to pay out at least 90% of their taxable earnings as dividends. It currently pays a forward yield of 5.8%, it pays monthly dividends, and it's raised its payout a whopping 125 times since its IPO in 1994.
Realty Income is a net lease REIT, which means its tenants cover most of their own property management expenses like maintenance costs, property taxes, and insurance fees. It owns 15,450 properties across the world, and its top tenants include resilient retailers like Walgreens, 7-Eleven, Dollar General, Dollar Tree, and Walmart.
Some of its tenants have been struggling with store closures in this challenging macro environment, but its occupancy rate has never dipped below 96% over the past three decades.
Why is Realty Income a better investment than Altria?
Realty Income pays a lower dividend yield than Altria, but it operates an evergreen business model that isn't stuck in a secular decline. While Altria needs to carefully raise its prices, cut costs, and invest in new products to keep growing its profits, Realty Income simply needs to buy more properties, rent them out, and maintain high occupancy rates.
NYSE: O
Key Data Points
Realty Income's stock will also become a lot more attractive as interest rates decline. Its stock already declined more than 20% over the past three years as rising rates made it more expensive to take on fresh debt and buy new properties. Higher interest rates also made fixed-income investments more attractive than REITs and dividend stocks.
But as interest rates decline, those investors should pivot back toward top REITs like Realty Income. And at $53, Realty Income's stock looks historically cheap at just 13 times last year's adjusted funds from operations (FFO) per share. That might be why its insiders bought up more than twice as many shares as they sold over the past 12 months.
Should you also buy Realty Income instead of Altria?
Altria outperformed Realty Income over the past three years, but that was mainly because the former was less sensitive to interest rate hikes than the latter. Once those closely watched interest rates stabilize and decline again, Altria will become a less appealing investment as investors focus on its dwindling cigarette shipments and market share losses.
At the same time, Realty Income's stable growth should make it a more attractive income investment. Therefore, I believe it's the right time to step away from high-yield value traps like Altria and pivot back toward undervalued REITs like Realty Income.
