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This 6.5% Dividend Is One Sure Path to a Wealthy RetirementBy Dan Ferris, editor, Extreme ValueFriday, February 4, 2011 One of the world's all-time greatest income investments is on sale right now: cigarette maker Altria Group (MO).
Before we go any farther with that idea, let's get one thing out of the way. Yes, it's true... The cigarette market in the U.S. is declining. Historically, it's been declining at about 1% a year. Lately, it's been closer to about 4% a year.
Altria sells Marlboro – and brands like Parliament and Virginia Slims – exclusively in the U.S. But despite the declining U.S. cigarette market, Altria still makes substantial profits. It generates huge cash flow and pays out an ever-increasing dividend.
Altria has raised its dividend every year for 44 years in a row. In 2007, it spun off international rights to Marlboro and its other brands to Philip Morris International. Since then, its dividend has risen 31%.
That's a powerful trend, one that won't end or reverse any time soon.
You see, Altria sells more than just cigarettes. And despite falling cigarette volumes, overall tobacco industry profits are growing.
In 2007, Altria bought John Middleton, a large producer of machine-made cigars. In 2009, it bought UST, the largest maker of smokeless tobacco. (With the UST acquisition, Altria also got Ste. Michelle Wine Estates, which makes premium wines.)
These acquisitions were smart. Smokeless tobacco grew 7% in 2008. Machine-made large cigars grew about 3%. Better still for Altria shareholders, its share of this growing profit pool is growing, too. Altria had a 46% share in 2007 and a 55% share in 2010. In 2007, Altria made 90% of its $10.6 billion in profit from cigarettes. In 2010, it got 75% of $12.4 billion in profit from cigarettes.
That's better than its peers... Lorillard gets virtually all its profit from cigarettes and Reynolds American gets 84% of its profit from cigarettes. So Altria has less exposure to the declining market.
Buying these new businesses lets Altria distribute new products at a lower cost than ever before. It does so by using its existing cigarette distribution network, which is the largest in the country. Think about it. Smokeless tobacco, cigars, and wine are sold just about everywhere cigarettes are sold. Naturally, Altria can sell more of those products than anyone else and do it for less money.
Altria also has a huge advantage over new competition in the cigarette market. The Marlboro brand alone is larger than Altria's two largest competitors combined. It's larger than the next 12 brands combined. And it just doesn't make sense to invent a new cigarette brand in a declining market, especially when you have to compete with a behemoth like Altria.
The effects of Altria's dominance and the overall growth of the tobacco market are clear... From 2007 to 2010, Altria's earnings grew 8.2% per year. And as I said, its dividend is up 31%.
DailyWealth readers know I love buying World Dominating, dividend-growing stocks at the right price. It's the only sure path to wealth I know.
Because its market is confined to the U.S., Altria isn't technically a World Dominator. But it owns the largest chunk of the world's largest market, so I'll give it an honorable mention. And I won't hesitate to say buying today, when this stock is yielding nearly 6.5% (and growing!), is one of the best income bets in the market.
Good investing,
Dan Ferris
Further Reading:
Here's what you don't know about cigarette companies: If Big Tobacco fails, municipalities all over the United States fail. "That's no phantom idea, either," Dan writes. "There's real leverage here..." Find out what it means for Altria and its dividend here: Why Your Government Wants You to Smoke Cigarettes.
And learn how the government is protecting Altria from competition here: Get 7% Dividends from the Most Profitable Stock in American History.
A HUGE TREND NO ONE IS TALKING ABOUT Today's chart shows the continuation of a huge, little-known trend we've highlighted several times in the past year. The trend is the extreme correlation between the performance of commodities and the stock market.
You see, most folks view ownership of commodities like crude oil and copper as "portfolio diversification." And sometimes, it is. But not these days...
These days, there's little difference between a position in commodities (as represented by the benchmark CRB index) and a position in stocks (as represented by the benchmark S&P 500 stock index). It's all become part of a big "risk on, risk off" trade. The thinking here is, if the economy is doing well, both types of assets will rise. If the economy is in the dumps, both assets will fall.
For a picture of this "no difference" situation, we present an 18-month performance chart of the gains made in commodities (the black line) versus the gains made in the S&P 500 (the blue line). As you can see, the two assets are moving in lockstep and have produced almost identical gains in the past year and a half. So... get long commodities? Or get long stocks? There's no difference. It's just "risk on, risk off" these days... |
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