Yes, it’s true. I know investors who own Altria Group (NYSE: MO) and earn a 9.7% dividend yield on their investment.
What’s the catch? Altria shares yield 4.1% based on the current price.
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Is the 9.7% dividend yield achieved by overlaying options, leverage, or some sophisticated strategy?
The answer is NO.
risky or sophisticated is overlaid. Altria’s 9.7% dividend yield is simply the product of time and dividend growth.
But don’t rush to discount that which is simple.
I first recommended Altria to High Yield Wealth readers in 2011 when Altria shares traded at $27.
The dividend had just been increased, as it had been for past 40 years. The dividend would be paid at $0.41 per-share each quarter for the next 12 months. The forward yield on the cost basis was 6%.
As we approach our six-years of owning Altria shares, and the forward yield on our cost basis approaches 10%.
Altria recently increased its dividend, as it has now done annually for the past 46 years. The latest increase lifts the quarterly payment to $0.66 per share for the next 12 months.
Our High Yield Wealth cost-basis price on my initial recommendation was $27.26. The improved dividend generates a 9.7% on the cost-basis price. Altria’s share price has doubled since.
Altria is hardly a growth stock. We’re talking cigarettes here. Marlboro rules the roost, to be sure, claiming 45% of the U.S. market. The roost, though, becomes more confining each year. Fifteen years ago, 23% of U.S. adults smoked. Today, 15% smoke.
The good news for Altria investors is that cigarettes are relatively price inelastic. Rising prices are less of a deterrent to demand compared to rising prices on most consumer products.
More good news is found in the quality of Altria’s management, which is exceptional. Altria already has high margins, but management continually raises the bar. Gross, operating, and net margins inch higher year after year.
Exceptional management is further evinced by intelligent acquisitions.
Though cigarette consumption falls, smokeless tobacco consumption holds steady. Altria’s 2008 acquisition of US Tobacco, the maker of Skoal, Copenhagen, and other smokeless tobacco has proven to be worth every penny of the $10.4 billion purchase price.
Altria’s revenue grows at a 3% annual rate, but earnings per share grow at a rate two-to-three times that. Continual earnings growth leads to continual dividend growth. Earnings grow 7%-to-9% year after year, and so does the dividend.
As the dividend goes, so goes the share price. The $27 share price found in 2011 is no more. Altria shares trade in the mid-$60s. They traded in the mid-$70s in July.
Why the discount from July?
Investors are peeved because the U.S. Food and Drug Administration intends to lower nicotine levels in cigarette. Investors peevishness has manifest in irrational dumping of the stock.
The selloff in Altria stock is irrational.
First, the FDA will impose its it’s requirement in steps spread over years. Second, the FDA’s new rules could actually increase cigarette consumption. To experience the same nicotine pleasure offered by the former cigarettes, smokers will need to smoke a greater number of low-nicotine cigarettes.
In other words, Altria is on sale. The sale offers an opportunity. Investors can buy Altria shares that yield 4.1% today. That starting yield has been unavailable for the past two years.
Yes, the 4.1% dividend yield isn’t quite as attractive as the 6% yield six years ago. It’s still a good starting yield.
With time and patience, you too may be able to capture a 9.7% Altria dividend yield from this stock. And if your investment in the stock doubles, all the better.
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Stephen Mauzy, CFA