Tobacco giant Altria (NYSE:MO) offers investors a delicious 9% dividend yield. It’s a far higher rate than that S&P 500 Average that only gives 1.4%. The danger with Altria, however, is that its payout ratio is high and its long-term future is questionable given the slowing demand for cigarettes. Investors who buy the stock take on significant risk, especially if they rely on continued dividend payments.
Instead of investing in a risky dividend stock, investors may be better off buying shares of a company that offers a more modest payout but whose future is much more certain over the longer term. One of the best and safest dividend stocks you can buy and forget about today is the consumer staples giant Procter & Gamble (NYSE:PG). Here’s a closer look at why it could be a clear buy for long-term income investors, despite the much lower 2.5% yield.
Procter & Gamble just increased its dividend for the 68th consecutive year
On April 9, Procter & Gamble announced 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.
The 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 has only increased its dividend by 23% in five years. And more importantly, in the coming years, it’s less certain whether the company will be able to increase its dividend at all. Currently, Altria’s payout ratio is over 81%; Procter & Gamble’s payout ratio is around 61%.
The company’s business looks rock solid
It’s not just dividend strikes or payout ratios that investors should consider when considering dividend stocks. Most important is the company’s long-term prospects, and this is where Procter & Gamble stands apart as a much safer investment than Altria.
With top consumer brands such as Pampers, Bounce, Gillette and many others in its portfolio, Procter & Gamble has a broad product mix that reaches many different customers. The company is also able to pass rising costs on to consumers to offset the impact of inflation. In third-quarter fiscal 2024 results for the period ended March 31, Procter & Gamble’s net sales rose 1% to $20.2 billion and diluted earnings per share rose 11% to $1.52 -Dollar. The company expects sales growth of between 2% and 4% for the entire financial year.
In comparison, Altria reported revenue of 2.5% Waste in the last quarter (also for the period up to March 31). And although the company’s net profit increased by 19%, it did so with the help of returns from investments; the operating result even fell by 3%.
While Procter & Gamble may only see modest growth, its business looks secure in the long run. However, over time, Altria’s numbers could worsen as demand for tobacco cigarettes declines. Although the company is trying to transition to oral tobacco products and safer options for consumers, the road ahead could still be long and uncertain for the company. Altria’s dividend still appears safe today, and its financials aren’t quite as bad, but they could be even worse in the coming years.
Procter & Gamble is an ideal yield stock to buy and hold
Procter & Gamble’s dividend yield may not look nearly as attractive as Altria’s. However, if you plan to invest for the long term, there is a risk that there could be a dividend cut if Altria’s business runs into trouble. The payout ratio is already somewhat high, and with such a high yield, investors are not buying the tobacco company’s shares, which could be a sign that they are wary of the stock, despite its usually tempting dividend.
The more sensible and safer approach for investors is to buy Procter & Gamble shares. Over the last 10 years, it has delivered a total return (including dividends) of around 160%, versus 100% for Altria. And with a brighter future ahead, it may remain a better investment in the long run.
Should you invest $1,000 in Procter & Gamble now?
Before you buy Procter & Gamble stock, consider the following:
The Motley Fool Stock Advisor The analyst team has just identified what they think this is The 10 best stocks so investors can buy it now… and Procter & Gamble wasn’t one of them. The ten stocks that made the cut could deliver huge returns in the years to come.
Think about when Nvidia created this list on April 15, 2005… if you have $1,000 invested at the time of our recommendation, You would have $525,806!*
Stock Advisor provides investors with an easy-to-follow roadmap to success, including guidance on building a portfolio, regular updates from analysts, and two new stock picks per month. The Stock Advisor has service more than quadrupled the return of the S&P 500 since 2002*.
See the 10 stocks ยป
*Stock Advisor returns as of April 30, 2024
David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
Forget Altria: Could This Be the Safest Dividend Stock? was originally published by The Motley Fool