Investors who buy Altria's stock for its dividend could be taking on some considerable risk.
Tobacco giant Altria (MO 0.28%) provides investors with a mouthwatering dividend yield of 9%. It's a far higher rate than the S&P 500 average, which yields just 1.4%. But the danger with Altria is that its payout ratio is high, and its long-term future is questionable given the waning demand for cigarettes. Investors who buy the stock are taking on considerable risk, especially if they are relying on its dividend payments to continue.
Rather than investing in a high-risk dividend stock, investors may be better off buying shares of a company which offers a more modest payout but whose future is much safer in the longer run. One of the best and safest dividend stocks that you can buy and forget about today is consumer goods behemoth Procter & Gamble (PG -0.13%). Here's a closer look at why it may be a no-brainer buy for long-term income investors despite its much smaller yield of 2.5%.
Procter & Gamble just raised its dividend for a 68th consecutive year
On April 9, Procter & Gamble announced that it would be increasing its quarterly dividend. At $1.0065, the new dividend is 7% higher than the $0.9407 that the consumer goods company was previously paying. And over the past five years, Procter & Gamble has increased its dividend by 35% from the $0.7459 that it was paying investors back in 2019.
The dividend increase marks the 68th consecutive year which Procter & Gamble has raised its dividend. Even among Dividend Kings, Procter & Gamble has one of the longest dividend streaks going. Altria is part of the group as well, but it has increased its dividend by just 23% in five years. And more importantly, in the years ahead, it's less certain that it can continue raising its dividend at all. Currently, Altria's payout ratio is at more than 81%; Procter & Gamble's payout ratio is at around 61%.
The company's business looks rock solid
It's not just dividend streaks or payout ratios which investors should consider when looking at dividend stocks. What matters the most is the long-term outlook for the business, and this is where Procter & Gamble distances itself as a much safer investment than Altria.
With top consumer brands such as Pampers, Bounce, Gillette, and many others in its portfolio, Procter & Gamble has a broad product mix which reaches many different customers. The company is also able to pass on rising costs to consumers to help offset the effects of inflation. In its third-quarter earnings for fiscal 2024, for the period ending March 31, Procter & Gamble's net sales rose by 1% to $20.2 billion, and its diluted per-share profits jumped by 11% to $1.52. The company anticipates that for the full-fiscal year its sales growth will be between 2% and 4%.
Altria, by comparison, reported a 2.5% revenue decline in its most recent quarter (also for the period ending March 31). And while the company's net earnings did rise by 19%, that was with the help of income from investments; its operating income actually fell by 3%.
While Procter & Gamble may only generate modest growth, its business looks safe in the long run. Meanwhile, over time, as there is less demand for tobacco cigarettes, Altria's numbers may deteriorate. Although the company is trying to transition to oral tobacco products and safer options for consumers, it could be a long and uncertain road ahead for the business. Altria's dividend still looks safe today, and its financials aren't all that bad, but they could be worse in the years ahead.
Procter & Gamble is an ideal income stock to buy and hold
Procter & Gamble's dividend yield may not look nearly as attractive as Altria's. But if you're planning to invest for the long term, the risk is that a dividend cut could happen if Altria's business struggles. Its payout ratio is already a bit high and with such a high yield, investors aren't snapping up the tobacco company's shares, which may be a sign that they are wary of the stock, despite what may normally be a tempting dividend.
The sounder and safer approach for investors is to buy Procter & Gamble's stock. Over the past 10 years, it has generated total returns (including dividends) of around 160% versus 100% for Altria. And with a brighter future ahead, it's likely to remain the better investment for the long haul.
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.
