The "Wizard of Wharton," Dr. Jeremy Siegel, famously boasted through his research that dividends are the key to long-term investing success. His most famous paper tracked the S&P 500 from 1957 to 2003 and came with some startling findings. He found that the number one stock, in terms of overall returns during this period, produced near 20% average returns over the period. That basically means that a small $1,000 investment into this stock would be worth more than $4 million at the end of the period.

IN PICTURES: How To Make Your First $1 Million

A "Sinful" Industry
Tobacco giant Altria Group (NYSE:MO) and its spin-off Philip Morris International, Inc. (NYSE:PM) are still minting cash and providing great returns for their investors. Combining high dividends, a recession resistant product and a value stock stint due to the perceived risks associated with that product, tobacco stocks maybe just what the income investor is looking for.

According to a study published in the Journal of Financial Economics, companies related to sin industries have produced yearly returns 3.5% higher than other stocks. Institutional managers also own fewer shares of sin companies; owning only 23% of outstanding shares versus around 28% from firms such Clorox (NYSE:CLX). This causes sin industry stocks to trade at 15-20% discounts relative to their peers.

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Add this to their strong balance sheets and steady free cash flow and you have recipe for high dividends and income gold. (To learn more about "sin" industries, take a look at Socially Responsible Investing Vs. Sin Stocks.)

The Dividend Leaders
While Altria and its various spinoffs get most of the attention in the tobacco world, there are many profitable and generous dividend payers to be had in the sector. Here are a few of the higher and better quality picks for an income portfolio.

Owning more than half of the world's top cigarette brands including Camel, Reynolds American (NYSE:RAI) is the other 800lb gorilla in the room. Using its new smokeless tobacco Snus products, the company has been able to weather the overall slowdown in cigarette sales. The company has seen a 15% annual dividend growth rate over the past five years and currently yields an impressive 6.6%.

Offering the largest dividend yield in the cigarette space, currently at 10.70%, Vector Group (NYSE:VGR) offers a compelling portfolio play. Operating in the discount space of the tobacco market, Vector has been able to capitalize on higher cigarette taxes pushing lower income smokers out of premium brands. In addition, the landmark 1998 litigation settlements with 46 states require only the three largest cigarette makers to pay the fees. Vector is fifth on the list. While Reynolds and Altria are stuck paying the bill, Vector can sit back and wait.


While not a direct cigarette manufacturer, Universal Corporation (NYSE:UVV) does allow investors to play the agriculture side of smoking. The company is the world's leading leaf tobacco merchant and processor with operations around the world. The company serves as a gateway between farmers and cigarette manufacturers. The company yields the least on this at 3.5%, but trades at the lowest P/E at just above 10. This leaves investors with enough room for capital gains, but a still provides a steady growing dividend yield.

The Bottom Line
While tobacco may be considered a sinful endeavor, cigarette stocks may be just what an income portfolio needs in the current zero rate world. Their steady cash flows and recession resistant products make them ideal long-term holds.

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