9.5Yielding

High-yielding dividend stocks are tempting because they can provide you with a lot of recurring income. But when the yields become excessively high, there’s usually a good reason they’re at those levels — namely, investors are getting a premium for the risk involved.

One stock that falls into that category is tobacco maker Altria Group (MO 0.20%). At 9.5%, it pays a dividend yield that is more than six times the S&P 500 average of 1.5%. But just how safe is that dividend?

What Altria’s latest earnings numbers say

Altria recently released its full-year results for 2023, including the last three months of the past year, which can provide investors with some valuable insight into how the company is doing and whether the dividend is in trouble.

For the fourth quarter, which ended on Dec. 31, 2023, Altria’s net revenue dropped by 2.2% to just under $6 billion. Its overall net earnings fell by 23.4% to a little less than $2.1 billion. While the decline sounds significant, the big reason for the change was simply a higher provision for income taxes; Altria’s pre-tax earnings actually rose by 1.1%.

The company’s operating income, which can often be a better measure of profitability since it excludes taxes and investment gains and losses, totaled $11.5 billion for the year, which was down 3.1% from 2022.

Overall, it wasn’t a bad performance for the company despite rising inflation and consumer spending coming under pressure.

Altria still expects to increase its dividend

Altria’s payout ratio is 84% based on its most recent quarterly results. Diluted earnings per share (EPS) totaled $1.16.

That’s not a terribly high payout ratio and there is even room for the company to justify increasing its dividend, which Altria plans to do. Along with expecting its adjusted diluted EPS to grow, the tobacco giant is projecting that its dividend will also rise by mid-single digits until 2028. Last year, Altria boosted its dividend by 4.3%, pushing its streak to 58 dividend increases in 54 years.

Can investors rely on the dividend for the long term?

It sounds promising that Altria expects its dividend to grow, but investors don’t appear to be sold on that. If they were, the stock price would likely rise and the yield would come down. But that isn’t happening. Shares of Altria are down 13% over the past 12 months and the stock trades at just 8 times its estimated future earnings.

The company is still relying heavily on smokable products. Revenue from that segment totaled $21.8 billion last year, accounting for 89% of all sales. Its oral tobacco products contributed $2.7 billion and made up 11% of the top line. While the business is still doing well despite a decrease in smoking rates, the danger for investors is how much of a decline in revenue and profitability it may suffer in the long run should consumers continue to shift to smokeless products. More than 42% of adults in the U.S. smoked in 1965, and that percentage is down to less than 15% today.

If Altria can’t transition to products with better long-term growth prospects, it may only be a matter of time before a dividend cut takes place.

Altria’s dividend is safe for now

A dividend cut doesn’t appear likely for Altria in the near future given its resilient results. The company knows how important the payout is to investors. After all, there’s not much of a reason to invest in Altria right now besides the high dividend; its growth days look to be long gone.

But if you’re a long-term investor looking for a dividend stock you can buy and forget about, Altria isn’t it. The company has an uncertain future, and while a dividend cut may not happen in the next year or even the next five, investors shouldn’t be too comfortable with the payout. Unless you’re willing to keep close tabs on the business, you may be better off going with other dividend stocks.