﻿Today, I’m going to share a high yield dividend stock that has the potential to
generate MASSIVE income, especially when using the power of dividend reinvestment. This is a
stock that I personally own in my portfolio. That is the Altria Group, ticker symbol MO.
Altria’s actually my highest dividend payer, with an expected annual income of $747 over
the next year. My upcoming quarterly dividend payment this January is $186.95. I reinvest
these dividends to acquire more shares, creating a dividend snowball effect. Throughout this video,
I’m going to briefly analyze Altria Stock and then model out future projections of
how reinvesting dividends with Altria can earn both HUGE dividend income and capital gains.
My name is Zach and you should leave a like and subscribe to the channel if you enjoy
the video. The stock research, portfolio tracking, and dividend reinvestment model
are available on my website dividenddata.com. Check that out for great investing tools.
Altria is a dividend king, meaning they have over 50 years of consecutive dividend increases. This
may not seem like the case depending on your data source, but the 2007 and 2008 drops were caused
by the spin-offs of Kraft foods and Philip Morris International. Altria retained the Philip Morris
USA business, along with other tobacco & nicotine companies. Additionally, they’ve made strategic
investments, some of which have failed mightily like their 2018 minority investment in Juul.
Overall though, Altria is a cash flow machine. In fiscal 2021, they generated $8.2 billion in
free cash flow or $4.52 on a per share basis. With a current market cap of $82.8 billion,
the company is trading at just over 10 times free cash flow. Altria aims to maximize
capital returned to shareholders. Since the 2008 spin off of PMI, Altria has returned a
total of $78.95 billion. This is through both dividends and share repurchases. The
company has paid $63.66 billion in dividends and $15.29 billion in share repurchases. That
is very impressive and capital returned has only been growing overtime. But is this sustainable?
The current forward-looking annual dividend $3.76. At current stock prices, this gives Altria
a 8.13% dividend yield on cost. So for every $100 invested you’d earn $8.13 in dividends, assuming
the dividend is unchanged. This is incredibly high, leaving many to wonder if it’s too good
to be true. Is the stock's dividend at risk? According to the company's investor page,
“Altria Group's target dividend payout ratio is approximately 80 percent of adjusted earnings per
share”. The key word here is adjusted earnings per share. Many look at Altria’s payout ratio
and assume it’s unsustainable in recent years. However, that calculation is often done with net
income or GAAP EPS by default. This metric takes into account unrealized investment losses. Altria
has suffered dramatically from these on-paper losses, most notably with their continued
write downs on the large Juul investment. While being terrible financial outcomes,
these are non-cash expenses that do not impact their ability to pay and grow their dividend.
Free cash flow is the metric you want to look at for this. Cash in. Cash out. By this metric,
Altria is well around the 80% range outlined as their goal. So I’d say Altria’s dividend
is quite safe. It has continued growing year after year. The past 2 increases were each over
4%. This growth will likely continue in line free cash flow growth. Over the past 10 years,
free cash flow per share is growing at a 10.27% compound annual growth rate. This
has slowed in recent years, but slow growth is safe to assume. So what kind of returns
can you expect from investing in Altria? Let’s model out 35 years under the assumption
of sustainable low growth. We’ll look at a one-time investment of $10,000. The current
stock price is $46.24 and the annual dividend payment is $3.76. This is a quarterly dividend
and we will be reinvesting earned dividends. For the expected growth rates, I’ll put the
compound annual growth rate of the dividend at 4% and the CAGR of the stock price at 5%.
With this investment, you’ll initially purchase 216.26 shares, earning a quarterly dividend of
$203. However, when reinvesting dividends you will continually acquire more shares, increasing your
ownership stake and future income. This is what us dividend investors call the dividend snowball
effect. This leads to an insane compounding effect over a long time period. By year 10,
you’re earning over $570 a quarter and purchasing 7.8 shares. By the end of 35 years, you’d
be estimated to have a total of 2,166 shares. Your ownership stake is exponentially growing
as you reinvest dividends. You’d be earning an estimated $7,626 every quarter in dividends,
allowing you to purchase 28.88 more shares. This all only assumes a 4% CAGR of the annual
dividend. That is not an outlandish assumption. This Altria Model is a fantastic representation of
the power of dividend reinvestment. The difference between reinvesting and not reinvesting dividends
is staggering. In year 35, you’d have an estimated total value of $572.1k when reinvesting dividends
and $57.1k in when not reinvesting dividends. This is a difference of $515k. That is immense.
It should be noted that although the total value is much lower, you would receive all
earned dividends as cash. In totality, you earn $59.8k when you don’t reinvest dividends,
which is far from closing that gap in total value. When reinvesting dividends, you will actually earn
far more total dividends. In this projection, you will earn $307.6k in total dividends. The
reasoning for this is that when reinvesting dividends you’re actually growing your ownership
stake overtime. If you didn’t reinvest your dividends you would still only have your initial
216 purchased shares. The dividend snowball effect is real. This difference cannot be overstated.
By year 35, you’d be receiving $28.9k in annual dividends when reinvesting and $3k when not
reinvesting. Once again, a crazy difference from dividend reinvestment. This gap only continues to
widen overtime. At this point, you can continue reinvesting your dividends and see even more
massive growth than before or start taking out the payments as cash. Even if you choose to stop
reinvesting your payout will still continue to grow as the dividend is increased over time.
The power of dividend reinvestment is so underrated. It’s difficult
to conceptualize long-term compounding. With Altria and all other investments,
the earlier you can start investing the better. If we perform a dividend discount model of
valuation, using the same inputs, and a discount rate of ten percent,
you can see that Altria is currently undervalued. The calculated present value of future dividend
payments is $56.02, making the stock 17.46% undervalued. This doesn’t even account for
the power of dividend reinvestment. In my long-term dividend stock portfolio,
I own Altria stock and will likely be buying more soon. However, this is just my personal opinion
and should not be considered financial advice. Make sure to do your own research before making
any investment decisions. Past performance is not a guarantee of future success. Any individual
stock has a risk of being disrupted. Altria certainly has many risks. There are lawsuits,
regulation, poor strategic investments, and the overall trend of lower smoking rates.
Many people may even have a moral objection to investing in a tobacco related business.
That said, the investing principles discussed in this video are vital to understand.
If you want to try out my dividend reinvestment model, portfolio tracking,
and stock research tools, then check out my website dividenddata.com. Your support
is appreciated and the website will keep improving overtime. If you enjoyed the video,
subscribe to Dividend Data on YouTube and leave a like. Thanks for watching!