Smoking-Hot Dividend Stocks

By Investopedia Staff | May 31, 2012 AAA

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.

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Cigarettes
There are currently four cigarette companies in the S&P 500, and they boast an average dividend yield of nearly 5%. Interestingly, despite the negative public sentiment toward this industry, the companies' shares consistently get solid ratings from analysts; most receive "buy" ratings. 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) 5.10
Reynolds America (NYSE:RAI) 5.60
Lorillard (NYSE:LO) 5.00
Phillip Morris International (NYSE:PM) 3.60

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.

Fundamentals
Reynolds America carries a safe beta of 0.84 and provides shareholders with a solid return on equity of 256.04%. Likewise, Altria Group shares are practically indifferent to market movements, as is reflected in their beta of 0.4. A substantial 75.89% return on equity, in addition to the stock's significant dividend yield, makes this company an ideal investment. Overall, Phillip Morris has highly effective management, with return on equity of 256.04% over the fast twelve months 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.

SEE: Dividend Facts You May Not Know

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