One of the most tried and true strategies for creating a small fortune in the stock market is through dividend investing. That is the primary benefit of investing in the tobacco stocks that will be discussed below. Each comes with an attached dividend yielding substantial income. That income, reinvested over time, silently creates small fortunes.
Investing in tobacco stocks will not result in the creation of an overnight fortune. Instead, time is necessary. Yet, sensible investors know that it takes time to build wealth and tobacco stocks are a great source of the dividends with which to do so.
The other benefit of investing in tobacco stocks is that they are currently underappreciated. The industry remains in flux as consumers move from cigarettes toward other means of nicotine delivery.The result is what many investors perceive as temporarily lower prices due to that industry pivot. Let’s take a look at these companies.
Altria (MO)
Let’s run a base case thought experiment around Altria (NYSE:MO) stock. It’s a good way to understand the fundamental value of investing in the maker of Marlboro cigarettes.
As I write this, Altria stock trades for $44.81. The consensus outlook is that its shares should rise to $45.28 in the future. That increase would equate to a modest gain of less than 2%, hardly what investors are seeking. However, add in its dividend yielding almost 9% and those returns rise near 12%. Given that the S&P 500 rises roughly 10% annually, there’s a strong case for investing in Altria once its dividend is considered.
Furthermore, the company continues to handle the pivot away from cigarette smoking well. Altria’s most recent earnings topped estimates allowing the company to reaffirm guidance for the year.
Altria also enacted an accelerated share repurchase program a month and a half ago. That transaction shores up its ability to continue providing strong dividends for investors. It’s entirely logical to assert that Altria will reliably pay investors 9% into the foreseeable future as the tobacco industry pivots.
British American Tobacco (BTI)
British American Tobacco (NYSE:BTI) is even more attractive than Altria based on its dividend and forecast growth. All of these companies are the same: They are well regarded by analysts yet underappreciated as many remain wary of the future of tobacco companies.
Well, the math behind British American Tobacco is attractive. It serves as a strong counterpoint to those fears. Shares currently trade for less than $30 but are expected to rise close to $40. Each share also includes $2.97 of dividends annually. All told, the base case suggests that investing in British American Tobacco shares will result in a return exceeding 42%.
British American Tobacco is moving through the same pivot that is affecting all cigarette manufacturers. It seems to be handling the shift well, finding new growth in the process. British American tobacco’s ‘new categories’ became profitable in 2023, 2 years ahead of schedule. The evidence suggesting a strong pivot at British American Tobacco is clearly there.
Phillip Morris (PM)
Phillip Morris (NYSE:PM) is the last of the tobacco stocks to be discussed for investors hoping to silently create small fortunes. It offers a lot of the same as Altria and British American Tobacco overall. However, it does have a slightly lower yielding dividend, at 5.3%.
How one views those lower yields is a matter of opinion. to some, they represent a relative benefit in that they don’t require as much from earnings. Taken in that light, Philip Morris represents a more conservative choice for investors overall.
While that may be the case I would also note that the company is doing particularly well. The most recent earnings report showed strong sales and earnings both of which were above guidance.
Philip Morris’s electronic cigarette brand, IQOS, actually surpasses Marlboro in terms of revenues. Thus, it’s logical to argue that Philip Morris has best navigated the pivot away from cigarettes among all of the tobacco firms.
On the date of publication, Alex Sirois did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.