Stock of the Day: Altria (NYSE: MO)

by Ted Leinbach, Research Team, The Oxford Club 

High Yield Dividends & Recessions: How Sustainable Are They?

With many stocks these days offering up mouth-watering dividend yields, here’s the big question on every investor’s mind…. is it too good to be true?

The answer: Yes and No.

Historically, global dividend payments have tended to hold up quite well in the teeth of previous recessions. With the exception of 2002 and the mid-seventies when payments fell by less than 5%, dividends continued to rise. 

But this recession is different in a few ways. For example, with corporate profits falling and extremely tight credit, more companies are likely to cut their dividends in an effort to preserve capital.

To avoid these pitfalls, we use a filter to help identify strong companies with sustainable dividends. And we’ll show you why Altria (NYSE: MO) is a company that fits the bill.

Dividend Shopping – 4 Things to Avoid

When window shopping for strong, consistent dividend yields, avoid:

• The “heart of the crisis” – the financial sector – Many banks, insurance, and real estate firms are distressed and in the process of repairing their assets from the fallout, making them more likely to cut or eliminate payments altogether.

• Companies that have a history of cutting their dividend.

• Companies with yields that are way out of line compared to their peers.

• Companies whose dividends have fluctuated widely, based on quarterly results.

After screening through companies issuing dividends, we’re left with only a few strong candidates.

Altria (NYSE: MO): A Dividend Paying Machine 

Chief amongst these dividend paying stocks is Altria (NYSE: MO). Operating in the consumer goods and tobacco sectors, Altria is the largest manufacturer of cigarettes in the United States of America. Their diversified group of brand names such as Marlboro and Black & Mild, contributes to their non-cyclicality that plagues other industries during economic downturns. In short, their products are bought regardless of part of the economic cycle we’re in.

But it is their rich history of steadily increasing dividend payments that really sets this company apart. MO has paid out a steadily increasing dividend every year since 1970. It was only after the spin-off of Kraft Foods in 2008 that they reduced their annual dividend. (Shareholders were rewarded with Kraft shares instead.)

Yet, Altria continues to fuel growth of its current business using the same successful strategy: acquisition. MO just recently snatched up UST, Inc, a leading smokeless tobacco manufacturer, adding two more successful brands, Copenhagen and Skoal, to their existing portfolio.

Currently, this dividend machine still kicks out a yield of 7.5%. More importantly, MO’s outlook is solid. The company is expected to increase its annual earnings per share by 10% per year over the next five years. 

But perhaps one of the best things investors can use to their advantage right now is the power of compounding with the reinvestment of your dividends. You’ll be able to accumulate more shares, at low prices. And when the market improves, you will be rewarded with handsome returns.

If you’re looking for even greater diversification with your income investments, check out the Oxford Club’s Perpetual Income Machine. It is a unique portfolio consisting of eight closed-end funds, providing you with instant exposure to a broad range of solid assets, and high, sustainable dividend yields.

Comments

By submitting your comment you agree to adhere to our Comment Policy and Privacy Policy.

Check out our selection of daily investment research: