This Ultra High-Yield Dividend Stock Just Raised Its Payout. Should You Buy?

This Ultra High-Yield Dividend Stock Just Raised Its Payout. Should You Buy?

Among ultra-high-yield dividend stocks of long standing, you don't get much more reliable than Altria Group (NYSE: MO) . The company has consistently paid a generous dividend, and its stock is one of the market's rare Dividend Kings, meaning its management has enacted dividend raises at least once annually for at least 50 years in a row.

Sure enough, like clockwork, Altria made its habitual once-per-year dividend raise this summer. Here's a look at the particulars of the hike and whether it helps make the cigarette giant's stock worth owning.

A king in its industry

In mid-August, Altria declared its latest dividend raise. It decided to lift the quarterly payout by 4% to $1.02 per share, which pumps the forward yield up to 7.7% on the most recent closing stock price. The first distribution of the raised amount will occur on Oct. 10 to investors of record as of Sept. 16. So, there's still time for dedicated income stock fans to take advantage of the hike.

But should they? I've been convinced for some time now that Altria stock isn't a long-term winner, no matter how sky-high the yield -- and its dividend is up there for sure, paying several times the 1.3% average yield of S&P 500 index component stocks.

Altria's big problem is the continued and serious decline of the traditional cigarette market. With increasing general health awareness and anti-smoking campaigns from influential entities, such as the federal government, much of the American public has eschewed ciggies. From 2001 to 2021, hardly an epic stretch of time, the number of cigarettes sold in the U.S. declined by more than half to just over 190 billion in the latter year, according to data compiled by Statista.

Understandably, Altria is attempting to pivot to what it calls "a smoke-free future." This will be anchored by NJOY, the e-cigarette brand it acquired in June 2023 for a cool $2.75 billion in cash following the debacle that was its investment in troubled brand JUUL. The company was quick to point out in its latest quarterly earnings report that its shipment volumes for NJOY devices increased 80% quarter over quarter to 1.8 million units, and the brand's market share rose by 1.3 percentage points to 5.5%.

That's impressive up to a point, but then again, NJOY is a relatively new brand for Altria, and its mass rollout in this country began only recently. It feels, then, that those hefty shipment numbers derive from a relatively low base. And while vaping has been a growing trend, it might not be the savior of the cigarette industry. Again, according to Statista, the estimated compound annual growth rate (CAGR) for e-cigarette revenue from 2024 to 2029 is 5.8%.

That certainly isn't a bad figure, but probably not enough of a rise to offset the apparently eternal decline in traditional cigarette sales. Altria's second-quarter net revenue fell by nearly 5% year over year, largely because of this.

Of yield hunters and yield traps

Most investors who consider loading up on Altria or its publicly traded peers, like Philip Morris International and British American Tobacco (BAT), are well aware of the challenges the industry faces. Still, they've lately piled into all three companies, as the trio has notably outperformed the S&P 500 index year to date.

I think much of this popularity is due to yield; the three stocks all boast high figures, with Altria's theoretical 7.7% being beaten only slightly by BAT's 8%. Philip Morris is a laggard among the three but still delivers an appealing 4.3% on its payout.

Yield chasing is in fashion these days, particularly with Federal Reserve (Fed) Chair Jerome Powell's near-direct pledge recently to cut the regulator's key interest rate in the near future. Since this rate is a reference point for nearly any financial asset, investor payouts, like bond coupons, tend to drop when rates dip. So, it's little wonder that some market players are eager to get their hands on stocks with reliably high payouts.

In my view, this has left the share prices of the tobacco merchants inflated. It only compounds the secular decline in what is still very much their core business. I don't feel these price increases are sustainable, and the industry as a whole is set for a correction. Meanwhile, the ciggie merchants aren't the only high-yield dividend stocks in town, far from it. We need only to glance at the real estate investment trust (REIT) industry, to name one example, to find sturdy companies with generous distributions.

It's always tempting to jump into a company that has declared a dividend raise, particularly if it's raising an already ultra-high-yield dividend. Yet, I think Altria qualifies as a yield trap these days. I wouldn't be a buyer of the stock, particularly for the long term.

Before you buy stock in Altria Group, consider this: