Income Investing

The Case for MO

Today I came across this Twitter thread by @soloprosperity explaining the pros and cons of dividend king Altria (MO). I thought it was a great summary so I’ve included it below:

Some quick notes.


1.Addictive Product: Pretty steady ~2% Rev Gr Last 10 Yrs
2.Extremely Profitable: ~28% CFROCE
3.Low Reinvestment Requirement: FCF = 96% of OCF Last 10 Yrs
4.Margin Expansion Last 10 Yrs: Gross 53% -> 61% & CF 33% -> 48% 5.Dividend Seems Fairly Safe: Dividend Coverage is at 84% Last 5 Yrs
6.Regulations: Essentially no new competition. It is a wonderful business unless you have moral issues re: the product, but there are some ?s and reasonable reasons why multiples have compressed back to ~2011/2012 levels despite a very strong overall market during that ensuing period… 


1.Organic Growth: # of smokers continues to decline.
2.Accrual Build-Up: Net Income > Cash Flow for a decade. 
3. Capital Allocation: JUUL & Buybacks. Largest buyback year in the last decade was the year the stock was trading at it’s most expensive. 
4. Future Shareholder Yield: Dividend is safe, but when you factor in buybacks, Total Shareholder Yield has outstripped Free-Cash Flow over the last 5 years (Taken on Debt). Indicates buybacks could slow moving forward. 
5. Valuation: Yes, today’s levels bring it back to the 2011/2012 levels on various metrics, but the firm has traded at much cheaper valuations in the past (99’ 02’ 08-10’ etc.) and so lower is always a possibility. 

Again, wonderful business, but there are some legitimate questions about the company and the accrual build-up, JUUL acquisitions & capital allocation in general (Poorly timed buy-backs), cyclical topic re: # of smokers in the U.S. and so the price today is valid IMO. 

I do own the stock despite the concerns because the core business is so easy. At a cyclically-adjusted FCF Yield of around 8.7% today, plus 1-2% in growth, that alone gives me comfort in earning ~10% over the next 5 years. A possible re-rate could add to that. 

Lastly, I think there is a low-potential right-tail event in terms of marijuana federal legalization. Not something I am betting on happening with certainty, but I think Altria’s distribution network is a potential valuable asset if that happens.


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Dividend Investing’s Psychological Edge

In theory, the companies that provide the best return are the ones with projects that produce the best ROIC (return on invested capital). Let’s say a retailer (Company X) has discovered a new format of store that generates an ROIC well above what investors could get elsewhere. For this company it would make sense to retain all earnings to reinvest in more stores. It wouldn’t make sense to distribute cash back to investors.

Company X can generate better returns for investors by reinvesting in its own growth prospects. Therefore, Company X stock price should outperform other companies with less favourable growth prospects.

I get the theory and it makes sense. A stock with high growth prospects will tend to have a higher total return than a stock with lower growth prospects. (Of course, not all growth prospects become real so many growth companies eventually fall behind expectations. In fact, there is some research that suggests dividend growers outperform non-dividend stocks over the long run. But for this article, let’s use the simplistic assumption that growth stocks outperform dividend growth stocks.)

The assumption that growth stocks outperform dividend-paying stocks fails to consider investor behaviour and what actually happens at the account level. At the account level, a big segment of investors will perform better by investing in slower growing companies that pay regular and growing dividends.

Stock prices frequently experience corrections and bear markets. Investors have a tendency to ‘buy high, sell low’ – the opposite of what they’re supposed to do – because when stock prices are falling it often feels like the world is crumbling. The news is bad and investors have no idea how much the decline will be. So they see that their holdings are down 10, 20% and they sell. These emotional buy/sell decisions made at the wrong time have a huge negative impact to long-term returns. Indeed, investors tend to drastically underperform the S&P 500.

One of the critical components to becoming a decent investor is to control emotions. We need to fight millions of years of evolution telling us to run when things start to look bad.

My view is that dividend streams help to do that. An investor that holds a portfolio of dividend paying stocks will still receive a stream of cashflow into their account, regardless of stock price performance. I believe these payments are a form of positive reinforcement that rewards good investor behaviour – namely, doing nothing or investing more when stocks are down.

Taking this a step further, many dividend investors view their capital as the price of entry to receive a perpetual and growing dividend stream. You’re trading a lump sum for a stream of income. Investors who look at their portfolios this way will be even less inclined to sell when markets correct, for that would cut their stream of income.

In summary, dividend growth stocks might not produce higher total returns than growth stocks. However, dividend growth investing might because of the positive effects on investor behaviour.

Income Investing Investing

4 Dividend Growth Opportunities To Benefit From Market Decline

Some of you may know that I occasionally write articles for Seeking Alpha. To be honest I do this to draw attention to and to generate a little extra income.

I normally don’t promote these articles on DumbWealth, but this particular one seemed to get a lot of interest from dividend investors so I figured I’d let you know.


  • Stocks are on sale. Yet many allow emotions to get in the way of their investing success.
  • Research shows that the best long-term investing strategy is to invest when you have the money. Avoid market timing.
  • I neither have the time nor energy to track my investments constantly. I look for solid dividend growth companies I can buy and forget about.
  • I’ve identified four dividend growth companies that are currently trading 12-34% below their YTD highs and are worthy of further consideration.

Read my full article on Seeking Alpha