The main problem of high-yield dividend stocks is mathematics.
Dividend yield is calculated by taking the dividend-per-share and dividing it by the share price.
This means that – assuming the dividend-per-share doesn’t change – a fall in the share price will actually cause a rise in the dividend yield.
And that’s the trap many yield-chasing investors fall into – buying so-called high-yield dividend stocks that were only the case because of falling stock prices…
Only to take big capital losses from price further depreciating (even as their yield increases).
This is a trap we want to avoid at all costs…
Which is why the 8+% dividend yield you can collect from today’s daily stock pick comes not from a falling stock price (in fact, its share price has been stable, up about 6% over the past year).
But from over a decade of steadily increasing dividends.
You want this stock on your watchlist if you’re an income-focused investor.
Altria Group, Inc. (MO)
The parent company of Philip Morris USA, Altria has been scrambling to diversify away from the sunset cigarette business – a major transition that has seen its fair share of missteps along the way. Chief among them was the divestment of Juul early this year, which cost the company at least $12.5 billion.
The good news is that despite these missteps, Altria’s share price has remained stable – although you should know it has underperformed the market. But again, this is a pure dividend play, so as long as the dividend yield does not come from a falling stock price, that alone makes it worthy of consideration.
The next question is – how long can Altria sustain this dividend? Its long-term track record points toward it being able to keep increasing the dividend moving forward. But we live in a time where the business environment is rapidly changing, forcing companies to make many difficult decisions.
So, let’s take a quick look at the numbers. On the surface, Altria’s dividend payout ratio – currently standing at 120% – might seem uncomfortably high.
But if you compare its current annualized dividend-per-share of $3.76 with its adjusted diluted EPS of $4.84, the ratio looks much more comfortable. In fact, Altria has itself openly stated that its goal is to keep its dividend at under 80% of its adjusted diluted EPS.
And considering that Altria has been reporting slow but steady growth in its adjusted diluted EPS numbers, the dividend still looks solid.
In short, don’t be fooled by surface-level numbers that may scare you away from this dividend king.
To your wealth,
Felix @ Ace of Investing