There's No Denying Altria Group Has a High Yield, But This Stock Could Be an Even Better Buy for Dividend Investors Looking for Reliable Passive Income

When investing in dividend-paying stocks, the yield (annual dividend divided by stock price) is an important consideration. But it's not the only one.

Investors should understand the company's business and its results to assess the company's dividend sustainability. After all, a high dividend yield isn't helpful if the board of directors subsequently cuts the payout.

Altria Group's (NYSE: MO) stock has a 6.5% yield, and it doesn't seem likely to cut the payout anytime soon. But I prefer Coca-Cola's (NYSE: KO) shares, which yield 2.4% based on its stronger business prospects and dividend consistency.

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Looking beyond the high yield

Altria Group makes and sells tobacco and nicotine products. These include cigarettes, cigars, oral tobacco, and e-vapor products.

Most of the company's revenue comes from smokeable tobacco products (cigarettes and cigars). However, with lower demand, its revenue has been uninspiring for some time.

Revenue, excluding excise taxes, rose 3.1% year over year in the first half of the year. That sounds promising, but a closer look reveals that it's not that impressive. That's because the increase came from price increases that offset volume declines.

The smokeable products' division grew first-half sales by 3.5%, but volume fell 2.7% due to faltering demand for cigarettes. Obviously, that's not sustainable over the long run.

Management targeted a mid-single-digit percentage increase in dividends from 2022 through 2028, in line with management's earnings goal. Adjusted earnings per share grew 4.9% in the first half. Still, that pace might prove hard to achieve over the long run, given the reliance on price increases to boost revenue as demand falters.

Altria Group has raised dividends annually for more than 50 straight years, making the company a Dividend King. And its payout ratio of 89% doesn't indicate that streak is in immediate danger.

Still, long-term investors should look elsewhere for a better dividend-growth opportunity from a steadier business.

The case for Coca-Cola

Coca-Cola presents such an opportunity. For those concerned about consumers turning away from soda, it has become a broad beverage company. Its drink categories include water, juice, sports drinks, and plant-based beverages that it sells in more than 200 countries.

Admittedly, Coca-Cola has struggled lately with volume growth. But this had more to do with the overall shaky economy, including persistently high inflation that has left consumers weary. Notably, Coca-Cola gained market share, which leaves the company in a stronger position.

Fortunately, selling volumes have increased lately. The company's second-quarter revenue grew 5% compared to a year ago. That's after removing foreign-currency translation effects and the impact of acquisitions/divestitures. Higher volumes added 4 percentage points, and price/mix contributed 2 percentage points.

Coca-Cola has also been growing its profit. Second-quarter operating income gained 6% versus last year.

The business produces plenty of free cash flow (FCF), providing comfort to dividend-seeking investors. For the first half of the year, Coca-Cola generated FCF (operating cash flow less capital expenditures) of $6.9 billion. That means it can easily afford the $4.6 billion that it paid in dividends. Management expects FCF of $12.4 billion for the year, which will handily cover the roughly $10 billion in dividends.

Coca-Cola has an impressive dividend history, and it's also a Dividend King. Earlier this year, the board of directors raised the quarterly payout by 4% to $0.53 per share. That makes it 64 consecutive years with a dividend hike,

The shares 2.4% dividend yield isn't nearly as high as Altria Group's 6.5%. However, Coca-Cola's stock does have an above-market yield, with the S&P 500 yielding 1%.

Coca-Cola's fast-growing days seem likely behind it. Still, for investors looking for consistently higher dividends from a business producing steady sales and profit growth, Coca-Cola represents a better buying opportunity compared to Altria Group.

Lawrence Rothman, CFA 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.