Consumer Products

Are Tobacco Dividend Yields Getting Too Low for the Risk?

The trend of declining cigarette case volumes has been going on for years, or somewhere around two decades now. As of 2013, the Centers for Disease Control and Prevention (CDC) showed that only 18% of the population smoked. It was significantly higher a generation ago. Now the question that is coming up more and more is how the market of e-cigarettes is changing the landscape. Sure, the U.S. Food and Drug Administration (FDA) has proposed some regulation of non-traditional tobacco and nicotine products, but “vaping” is very profitable and it is growing, and this could be paramount for the big dividends that tobacco giants pay.

Go back to CDC figures from the past for trends and the dividend growth seems almost impossible. The CDC previously represented that adult smoking rates were 24.7% in 1997, 20.9% in 2005, 20.6% in 2009 and 18.0% in 2012. The paradox is that this steady decline in U.S. smokers has not kept the high dividends by Big Tobacco from going up each year.

And now a highly covered potential tobacco merger is supposed to be in the works. What this translates to would be a potential duopoly — and that might be great for dividend investors who do not mind that the companies they invest in are producing agents of death.

Altria Group Inc. (NYSE: MO) is within 1% of an all-time high around $41.50. Its unofficial target seems to be 85% for payout rates between dividends and buybacks. Its yield of 4.6% just exceeds Reynolds’. That is why Altria made our list of the highest-yielding dividends that are safe to hold. Altria has expanded into e-cigarettes, but it still lags.

Lorillard Inc. (NYSE: LO) is said to have a solid position in electronic cigarettes with the Blu e-cigarette. Now that Lorillard’s stock popped up so high, its dividend yield is down to 4%. Shares are close to $60, against a 52-week range of $41.56 to $63.56.

ALSO READ: How to Avoid the Next Stock Market Crash

Reynolds American Inc. (NYSE: RAI) has its Vuse brand e-cigarette, and its shares just hit an all-time high on Thursday of $60.28. This has driven the dividend yield down to an almost unheard of low of 4.45%.

24/7 Wall St. has opined before that the rise of the e-cigarette market actually may be a game changer for the world of high-dividend payments from tobacco companies. The perpetually declining case volumes of cigarette sales may have finally found a new avenue for nicotine addicts and nicotine lovers.