Altria (MO -1.42%) has long been regarded as a top dividend stock and it’s easy to see why.
The domestic Marlboro maker has raised its quarterly dividends 57 times over the last 53 years, making it a Dividend King. Because of its payout-hiking track record, Altria was the best stock to own for a nearly 50-year period from 1968 to 2015, if you had reinvested the dividends.
While the stock has underperformed since peaking in 2017, declining over a three-year period from 2017-2020, that was primarily due to a stretched valuation, a brief pause in profit growth, and investments in JUUL and Cronos Group that have gone sour. Despite its weak performance during that time, operating income has continued to march higher as the chart below shows, a sign the underlying business remains solid.
Today, it remains an appealing dividend stock with a dividend yield of 8.4%, one of the highest in the S&P 500, and its valuation looks much more reasonable than it was five years ago at a price-to-earnings ratio of less than based on adjusted earnings per share.
However, despite its rich yield, Altria isn’t the top-paying dividend stock in the broad-market index.
The top dividend stocks on the S&P 500
Based on yield alone, Altria isn’t the best dividend stock on the S&P 500. It ranks No. 3 behind Pioneer Natural Resources and Coterra Energy, oil and natural gas exploration and production companies with yields of 10.8% and 9.7%, respectively. However, there’s a catch with those two stocks.
Pioneer and Coterra both pay variable-rate dividends. In other words, their quarterly payouts are directly connected to their near-term profits, and their profitability depends on energy prices, which are volatile. The chart below shows how their dividends compare with Altria’s over the last five years.
Over the last year, as oil prices soared, the profits of companies like Pioneer and Coterra jumped. However, investors shouldn’t expect oil prices to stay so elevated. A number of factors could bring them back down, including a recession, the end of the war in Ukraine, or the widening adoption of electric cars. The fact that these companies trade at low price-to-earnings ratios indicates as much — it’s a sign that investors expect their profits to fall.
Pioneer, for example, trades at a price-to-earnings ratio of 8.4, and the company has a policy of paying 75% of the previous quarter’s free cash flow in dividends in addition to what it calls its base dividend. Since oil prices could fall this year, especially if there’s a recession, investors shouldn’t count on that 10.8% yield persisting.
Similarly, Coterra pays a $0.15 per-share base dividend each quarter and returns 50% of profits as dividends on top of that. In its most recent quarter, that added up to a payout of $0.68 per share. Currently, the company, which is known for fracking and extracting natural gas from Pennsylvania’s Marcellus shale, trades at a price-to-earnings ratio of just 5.5, a sign investors believe its profits will come down.
A rare combination
With the exception of spin-offs, Altria has never cut its dividend, and it has stuck to a policy of distributing 80% of its profits to shareholders through dividends. It’s been able to grow the dividend through price increases on its cigarettes even as tobacco consumption has steadily declined. Its position as a tobacco company also gives it an advantage over other dividend stocks as tobacco is a recession-proof sector. If you’re a smoker, you buy cigarettes regardless of the state of the economy, and that positioning makes Altria an especially rewarding stock to own in an uncertain economy like the current one.
In fact, Altria is the only defensive stock out of the top five dividend yielders, which also include Devon Energy, and VF Corp., an apparel seller. Its 8.4% yield, combined with its ability to support and consistently grow that payout, makes it the best dividend yield to own on the S&P 500 right now.
Altria has made some poor capital allocation decisions in its efforts to diversify away from cigarettes — choices that left it needing to write down its investments in marijuana grower Cronos Group and e-cig company JUUL Labs. However, it was still on track to grow adjusted earnings per share by 4.5% to 6% in 2022.
We’ll learn more when the company reports fourth-quarter earnings on Feb. 1. Analysts expect earnings per share to continue to grow through 2023, making Altria a good pick for income investors looking for stocks that can help them ride out this period of economic volatility.