Tobacco giant Altria (NYSE:MO) offers investors an attractive dividend yield of 9%. This is a much higher rate than the S&P500 average, which only brings in 1.4%. But the danger with Altria is that its distribution rate is high and its long-term future is questionable given declining demand for cigarettes. Investors who buy these stocks are taking on considerable risk, especially if they rely on dividend payments to continue.
Rather than investing in high-risk dividend stocks, investors might be better off buying shares of a company that offers a smaller payout but has a much more secure long-term future. One of the best and safest dividend stocks you can buy and forget today is the consumer goods giant. Procter & Gamble (NYSE:PG). Here’s a closer look at why it may be an obvious buy for long-term investors, despite its much lower yield of 2.5%.
Procter & Gamble has just increased its dividend for the 68th consecutive year
On April 9, Procter & Gamble announced that it would increase its quarterly dividend. At $1.0065, the new dividend is 7% higher than the $0.9407 the consumer goods company previously paid. And over the past five years, Procter & Gamble has increased its dividend by 35% from the $0.7459 it paid investors in 2019.
This dividend increase marks the 68th consecutive year that Procter & Gamble has increased its dividend. Even among Dividend Kings, Procter & Gamble has one of the longest dividend streaks. Altria is also part of the group, but it has only increased its dividend by 23% in five years. And more importantly, in the years to come, it is less certain that it can continue to increase its dividend. Currently, Altria The payout ratio is more than 81%; Procter & Gamble’s payout ratio is approximately 61%.
The company’s business appears strong
It’s not just dividend series or payout ratios that investors should consider when looking at dividend stocks. What matters most is the company’s long-term prospects, and that’s where Procter & Gamble stands out as a much safer investment than Altria.
With leading consumer brands such as Pampers, Bounce, Gillette and more in its portfolio, Procter & Gamble offers a wide range of products that reach 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 fiscal 2024 results, for the period ending March 31, Procter & Gamble’s net revenue increased 1% to $20.2 billion, and its diluted earnings per share jumped 11% to $1.52. The company expects full-year sales growth to be between 2% and 4%.
Altria, by comparison, reported 2.5% revenue. decline during its most recent quarter (also for the period ending March 31). And if the company’s net profit increased by 19%, it was thanks to investment income; its operating profit actually fell by 3%.
Even though Procter & Gamble only generates modest growth, its business appears safe in the long term. Meanwhile, over time, as demand for tobacco cigarettes declines, Altria’s numbers could deteriorate. Although the company is attempting to transition to oral tobacco products and safer options for consumers, the road ahead could be long and uncertain for the company. Altria’s dividend still looks safe today and its financials aren’t that bad, but they could be worse in the years to come.
Procter & Gamble is an ideal income stock to buy and hold
Procter & Gamble’s dividend yield may not be as attractive as Altria’s. But if you’re planning to invest for the long term, the risk is that a dividend cut could occur if Altria’s business struggles. Its payout ratio is already a bit high and with such a high yield, investors are not snapping up the tobacco group’s shares, which may be a sign that they are wary of the stock, despite what might normally be an attractive dividend.
The healthiest and safest approach for investors is to buy Procter & Gamble stock. Over the past 10 years, it has generated total returns (including dividends) of around 160% compared to 100% for Altria. And with a brighter future ahead, it’s likely to remain the best long-term investment.
Should you invest $1,000 in Procter & Gamble right now?
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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the securities mentioned. The Mad Motley has a disclosure policy.
Forget Altria: Could It Be the Safest Dividend Stock to Own? was originally published by The Motley Fool
