Dividend-paying stocks make up a healthy component of any investment portfolio. While telecommunications companies such as Frontier Communications Corporation (NYSE:FTR) are known to support high yields, the tobacco industry is another alternative that allows investors to reap the benefits of dividends. Cigarettes may not be healthy for consumers, but they can definitely breathe new life into your portfolio.

TUTORIAL: 20 Investments You Should Know

There are currently four cigarette companies in the S&P 500, and they boast an average dividend yield of nearly 5.5%. Interestingly, despite the negative public sentiment toward this industry, the companies' shares consistently get solid ratings from analysts; most receive "buy" rating, while the remaining ones carries a "hold" status. Furthermore, risk averse investors should not fear that strict regulation potential will cause major uncertainty in equity returns; in fact, tobacco companies experience less volatility than most other S&P shares.

Company Dividend Yield (%)
Altria Group (NYSE:MO) 5.80
Reynolds America (NYSE:RAI) 5.90
Lorillard (NYSE:LO) 5.40
Phillip Morris International (NYSE:PM) 3.90

With an ongoing push from governments and medical interest groups to decrease the number of smokers, these firms will eventually have to either merge or adapt to the dynamic cultural environment. However, these companies still have strong fundamentals and significant dividends, providing investors with high returns and portfolio diversification.

Reynolds America carries a safe beta of 0.69 and provides shareholders with a solid return on equity of 15.11 compared to the industry average of 4.63. Likewise, Altria Group shares are practically indifferent to market movements, as is reflected in their beta of 0.38. A substantial 13.17% return on investment, in addition to the stock's significant dividend yield, makes this company an ideal investment. Although Lorillard produces extraordinary returns and profit margins, investors should take note that this company could face some long-term concerns because it is highly leveraged. With a quick ratio of 1.50, there is a reason to be cautious of these shares. Overall, Phillip Morris has highly effective management, with return on assets that surpasses the S&P 500 index by 300% over five years and sufficient cash flows to satisfy interest payments well into the future.

Bottom Line
The cigarette sector faces similar criticisms as Hershey (NYSE:HSY) and Coca-Cola (NYSE:KO) because long-term, regular users of these companies' products are subject to health risks. However, despite the taboo nature of tobacco, these stocks can add value to an investment portfolio. With high returns, low betas, minimal volatility, superior return ratios and strong dividends, tobacco stocks remain a solid investment that's not showing any signs of quitting. (Discover the issues that complicate these payouts for investors. To learn more, read Dividend Facts You May Not Know.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Related Articles
  1. No results found.
  1. How do dividends affect retained earnings?

    When a company issues a cash dividend to its shareholders, the retained earnings listed on the balance sheet are reduced ... Read Full Answer >>
  2. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  3. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  4. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  5. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  6. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>

You May Also Like

Trading Center