This High‑Yield Dividend Could Make Patient Investors Rich in Retirement

Altria Group (NYSE: MO), parent company of Philip Morris USA, is not without its controversy. Some may object to adding this quintessential "sin stock" to their portfolios. However, many past investors have benefited from buying and holding this tobacco stock.

Including dividends reinvested, Altria shares have generated annualized returns nearing 18% over the past five years. For comparison, the S&P 500 index has delivered annualized total returns of around 13% during this same time frame.

Altria may be lagging its competitors in industry innovation, but if it can make progress resolving this issue, the impact on the stock's performance could be substantial.

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This tobacco stock has smoked its competition

A high dividend, coupled with steady dividend growth, has played a big role in Altria Group's strong long-term performance. Currently, Altria has a forward dividend yield of 6.3%. This stock is also one of the Dividend Kings, or a stock with over 50 years of consecutive dividend growth.

Assuming dividends are reinvested, Altria has outperformed not just the S&P 500 but also other consumer goods Dividend Kings. Since February 2021, Altria's total returns have totaled 128.6% versus 85.8% for the S&P 500, 81.7% for Coca-Cola shares, and 41.6% for Procter & Gamble shares.

This wave of outperformance comes despite Altria's lack of progress in adapting to changing nicotine and tobacco consumption habits.

The silver lining to Altria's smoke-free dilemma

In recent years, there have been plenty of headlines about how Philip Morris International (NYSE: PM), itself an Altria Group spinoff, has had greater success going smoke-free. Philip Morris International currently generates around 41.5% of its total net revenue from smoke-free products, including its Iqos heated tobacco device and Zyn nicotine pouches.

Altria, on the other hand, still generates around 88% of its total net revenue from smokeable products. Worse yet, its past smoke-free endeavors, including its investment in Juul Labs and its acquisition of Njoy, led to billions in impairment losses. Altria exited Juul at a loss due to legal and regulatory issues. Ironically, Altria's Njoy acquisition has largely failed due to losing a patent infringement suit filed against it by Juul Labs.

That said, Altria has continued to counter declining cigarette volumes with price increases. As a result, the company has continued to experience steady, albeit modest, earnings and dividend growth in the low single-digit range. Moreover, with smoke-free expectations set so low, even modest success with future smokeless products could significantly impact Altria's valuation.

Shares remain a strong buy-and-hold opportunity

With modest earnings growth expected to help Altria maintain its 6.3% dividend, shares remain well positioned to deliver solid returns for years to come. Better yet, future totals could continue to align with recent performance if the company finally executes a winning smoke-free strategy.

To further bolster its nicotine pouch business, now mostly made up of its On! brand, Altria could expand its product offering through acquisitions, such as acquiring a small competitor like Turning Point Brands.

Following smokeless success, the stock could benefit not only from stronger earnings growth but also from potential valuation expansion. Right now, Altria trades for just 12 times forward earnings, while PMI trades for over 22 times forward earnings. With this in mind, consider Altria a still-great buy-and-hold opportunity for dividend investors.

Thomas Niel has no position in any of the stocks mentioned. The Motley Fool recommends Philip Morris International and Turning Point Brands. The Motley Fool has a disclosure policy.