Prediction: These 2 dividend-paying stocks will outperform the market this decade

The artificial intelligence (AI) narrative has sent the stock market into overdrive. Nvidia it is now one of the largest companies in the world by market capitalization. The S&P 500 it’s close to a price-to-earnings (P/E) ratio of 30, which has only happened before in the late 1990s internet bubble and the 2021 COVID-19 pandemic bubble.

Despite this, there are many companies trading at reasonable or cheap prices that investors seem to have forgotten about. I think these stocks — especially those with high dividend yields that are set to grow — have a good chance of beating the S&P 500’s returns for the rest of this decade. Two actions that fit this bill are Philip Morris International (P.M 0.04%) and British American Tobacco (BTI 1.19%). Here’s why I think now is a great time to add these high-dividend-yielding stocks to your portfolio.

Philip Morris International: Moving beyond tobacco

Created after a spin-off from the Philip Morris USA business in 2008, Philip Morris International is one of the largest tobacco companies worldwide and the owner of the Marlboro, Chesterfield and other brands. Unlike the United States, cigarette consumption in Europe and other markets is not declining very quickly. This, combined with price increases to combat inflation and currency movements, has allowed the company to post strong earnings growth from these legacy brands over the past decade.

But that’s not all that Philip Morris International has. Through internal investments and acquisitions, the company has entered the new-age nicotine market with products that are less harmful to customers. Notable products in this category are Iqos, a smokeless cigarette device, and Zyn, a rapidly growing nicotine pouch brand in the United States. Combine all these products together and Philip Morris International has 36.5 million customers for these new products.

The addition of these growth segments changed the company’s financial profile. Total shipments are expected to grow 1% to 2% in 2024, with earnings per share (EPS) rising 11% to 13% as margins expand and cigarette prices are raised. With plenty of room to grow these new nicotine products and the relative stability of the tobacco division, Philip Morris International should be able to grow revenues to over 10% or more over the next five years and beyond.

And yet, the stock still trades at a dividend yield of 4.4%, which is well above the S&P 500’s average dividend yield of 1.3%. Poised for strong EPS growth, Philip Morris should be able to increase dividend payouts at a steady rate over the next five to 10 years and outperform the market.

PM Dividend Yield data by YCharts

British American Tobacco: very high dividend payments

One of the highest-yielding stocks out there — yielding nearly twice that of Philip Morris International — is British American Tobacco. Like its counterpart above, the company owns popular global cigarette brands such as Camel and Lucky Strike. However, unlike Philip Morris International, British American Tobacco has more exposure to the United States market. And the market is struggling.

In the first half of 2024, British American Tobacco’s fuel volume fell 12.5% ​​year-on-year. It is able to counter some of these declines with price increases, but it is still a big concern for the company and investors. That’s why free cash flow per share has grown over the past five years, reaching $5.30 in the past 12 months.

British American Tobacco also has a “new categories” segment, with oral nicotine pouches and vapor devices leading the way. It hasn’t been as successful in these alternatives compared to Philip Morris, but the segment is still on track to reach about $5 billion in annual revenue shortly and has just hit positive segment profitability.

As new categories continue to grow and become a benefit to consolidated earnings, as opposed to a headwind, I believe British American Tobacco can continue to grow its free cash flow per share over the next five to 10 years. even though the cigarette business continues to have an important level. the volume decreases. At a dividend yield of 8.1% and a final dividend payout of $2.90 per share, management has plenty of room to expand this dividend yield in the coming years.

Add it all up and I think British American Tobacco will likely outperform the S&P 500 over the next decade.