At first glance, Altria might look like a safe dividend stock — but that’s far from the case.
Altria Group (MO -1.08%) pays an extremely high dividend that yields 8.2%. It would take an investment of approximately $12,200 to be able to collect $1,000 in dividend income from Altria over the course of the year, at such a high rate.
Now, compare that to the average S&P 500 yield of 1.3%. To collect $1,000 annually from that payout, you would need to invest a whopping $77,000. There’s a huge incentive to buying high-yielding stocks, because the dividend income can be incredible.
But the risk is often significant with high-yielding stocks as well. The danger is that you can collect the dividend income for a year, maybe multiple years, but then what if it suddenly gets cut, or worse — the company suspends it? Then, there’s no more dividend income, and the stock is likely well on its way toward a massive crash. The dividend income may end up shielding some of your losses, but perhaps not all of them.
Altria investors may be tempted to take a chance on the stock and hope that its dividend lasts for a long time before things get to that point, but there’s a concerning trend you’ll want to consider before making that assumption.
Youth tobacco use is at a 25-year low
In a win for healthcare and a loss in future revenue for the tobacco giant, fewer young people are using cigarettes, and tobacco as a whole, than in years past. According to data from the 2024 National Youth Tobacco Survey, this year there were 2.25 million students in middle school and high school who have reportedly used any tobacco product (within the past 30 days), down from 2.8 million a year ago. That’s a 25-year low. The study indicates the decline is largely due to a drop in e-cigarette use and that cigarette smoking is the lowest it has ever been — just 1.4% of students in the study claimed they smoked.
Smoking rates have been declining for years, but with e-cigarette and any tobacco use down, that may imply a broader problem for a company like Altria, which is looking toward smoke-free products as alternatives for people who are trying to quit smoking. If younger people are not picking up the habit and there is less demand for any type of tobacco product, that could further diminish Altria’s already troubling growth prospects.
Altria’s dividend remains safe, but for how long?
Between Altria’s modest payout ratio of 67% and the company increasing its dividend 59 times in the past 55 years, you might be inclined to think this is a safe dividend stock to own. But when a business faces long-term risks to its core business model, the dividend could prove to be a ticking time bomb, even though the underlying financials may still look relatively stable.
MO Revenue (Annual) data by YCharts
The dividend is a key reason investors buy shares of Altria, and knowing how important it is to the stock, I believe Altria will try and do everything it can to keep paying it for as long as the business can afford to do so. But even if they do, a poor outlook for the stock could still leave investors with underwhelming returns, making it hard to justify owning the stock at all.
Investors should tread carefully with Altria stock
By just looking at the numbers, Altria may seem like an underrated buy and a solid dividend stock to own. But with a questionable future ahead, it doesn’t make for a good investment to hang on to. The stock has risen just 7% in the past five years, and future returns could be even worse as the demographics change and younger people don’t take up smoking, resulting in even worse growth prospects for Altria, even if it attempts to pivot to smoke-free tobacco products.
Altria’s dividend may look tempting, but just like a cigarette, investors are better off avoiding it, as it isn’t worth the risk.
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
