The importance of dividends has been well documented over the years, and here at The Motley Fool, there's nothing we like more than a great stock that pays you to hold it. That's why, a few months ago, I wrote an article describing what I thought was the best dividend stock around.
While some readers agreed with my sentiment that ADP (NYSE: ADP) is a superb company that consistently kicks out a dividend of 3.3%, there was overwhelming support in the community for one other, very particular company.
That company is Altria (NYSE: MO).
So in light of the comments I received on my last article, I figured it was only apt to ask the question: Is Altria truly the best dividend stock?
Despite the recession
With unemployment hovering around 9.5%, concerns over a double-dip recession, and the expectation that the U.S. recovery may be stalling, you'd figure that consumers would be reining in their spending -- especially on discretionary products.
However, Altria, which operates through its main subsidiary Philip Morris USA, has continued to boost sales of its tobacco and related products. Despite the recession, raised taxes and regulatory fears, the nation's largest cigarette maker actually boosted net income by 38%. Its leading brand, Marlboro, increased its market share and now owns about 42.7% of the U.S. smoking segment.
In addition, Altria's smokeless tobacco products saw a volume increase of 21.9% and a revenue increase of 24%. Did I mention that Altria has a 27% interest in SABMiller?
Consumers might be spending less, but the products that they're not cutting corners on -- cigarettes and alcohol -- just happen to be Altria's bread and butter.
So what about the dividend?
It's hard to argue against the staying power of Altria's products. You can't ignore the increased revenue or net income, or the fact that over the last 10 years, the stock has seen dividend-adjusted annualized gains of 20% -- far superior to the S&P 500's decline of 2%.
But what about the dividend -- what makes it so great? Let's check the stat book:
| Company |
Dividend Yield |
5-Year Dividend Growth Rate |
Paying Dividends Since |
|---|---|---|---|
|
Altria Group |
6.6% |
15.6% |
1928 |
Whenever you're purchasing a stock, and its dividend is part of the equation, you've got to ask yourself several questions:
- Has it been paying dividends for quite some time?
- Has it been increasing dividends?
- Is the yield comparable to other similarly priced companies?
Altria not only pays a great dividend, but it has been doing so for the last 70-plus years. In addition, its dividend-adjusted stock price has increased an average of 13% over the past half-decade. That combination of yield and capital appreciation is hard to come by. Now I see why so many investors are drinking the Altria Kool-Aid.
In my research, I ran across several other companies with comparable attributes to Altria. I think the following five companies stack up well against the cigarette king, and could possibly give it a run for its money as "the greatest dividend stock":
| Company |
Dividend Yield |
5-Year Dividend Growth |
5-Year Annual Return* |
|---|---|---|---|
|
Annaly Capital Management (NYSE: NLY) |
15.2% |
32.4% |
11.1% |
|
Telefonica (NYSE: TEF) |
8% |
26.8% |
9.3% |
|
Kinder Morgan Energy (NYSE: KMP) |
6.3% |
7.6% |
12.2% |
|
Unilever (NYSE: UL) |
3.8% |
6.1% |
9.2% |
|
Procter & Gamble (NYSE: PG) |
3.1% |
12.9% |
5.1% |
*Compound Annual Growth Rate, dividend-adjusted.
Comparing apples to apples
Unilever and Procter & Gamble are probably the most comparable businesses to Altria, considering they all provide consumer products that could easily be described as recession-proof. However, with a higher dividend yield and a P/E of 13, Altria seems like a cheaper way to earn higher dividends.
Telefonica currently pays a higher yield than Altria. In part because of the struggling Spanish economy, its share price has been beaten down over the last few months, leaving it at a desirable 9.4 price-to-earnings multiple. With 65% of its revenue coming from outside of its home country, Telefonica still seems set to boost revenue and gain market share in Latin America.
These days, the words "mortgage-backed" or "collateralized-debt" typically strike fear in the minds of investors. However, real estate investment trust (REIT) Annaly Capital Management, which pays a whopping 15.2% dividend, usually has the opposite effect. Despite a real estate bubble and depressed housing prices, Annaly has been able to earn 20% annual gains over the last 10 years -- no easy feat at all.
Kinder Morgan is a Master Limited Partnership (MLP) that specializes in the transportation and service of natural gas. Although somewhat exposed to the volatilities of the energy sector, Kinder Morgan operates heavily with take-or-pay contracts, meaning its customers either accept its product or pay a penalty. This helps Kinder Morgan sustain relatively stable cash flows, and in turn helps them dish out that sweet 6.3% dividend.
The Foolish bottom line
All of the companies mentioned above have great traits as dividend payers, and all have proven themselves over time. However, we all know that past success is never a definitive indicator of future performance. What we do know is that Altria offers a product -- albeit a controversial one -- that consumers seem all too happy to keep consuming, no matter what the price. I think that gives this company a distinct competitive advantage, which might just be why Altria shines above all the rest.
What do you think -- is Altria the best dividend stock there is, or do any of the companies above offer something greater? Sound off in the comments box below!
