This ultra high yielding dividend stock just raised its payout. Should you buy?

Among long-duration ultra-high yielding dividend stocks, you don’t get much more reliable than Altria Group (MO 0.77%). The company has consistently paid a generous dividend, and its stock is one of the market’s rare Dividend Kings, meaning its management has adopted dividend increases at least once a year for at least 50 years in a row.

Sure enough, like clockwork, Altria raised its regular dividend once a year this summer. Here’s a look at the details of the trip and whether it helps make the cigarette giant’s stock worth owning.

A king in his industry

In mid-August, Altria announced its latest dividend increase. It decided to raise quarterly payouts by 4% to $1.02 per share, which increases the forward yield to 7.7% at the stock’s most recent closing price. The first distribution of the amount raised will take place on October 10 to investors of record since September 16. So there is still time for dedicated fans of income stocks to take advantage of the growth.

But should it? I’ve been convinced for some time that Altria stock isn’t a long-term winner, no matter how high the yield — and its dividend is certainly up there, paying several times the 1.3% average yield of S&P 500 component stocks of the index.

Altria’s big problem is the continued and severe decline of the traditional cigarette market. With the rise of general health awareness and anti-smoking campaigns from influential entities such as the federal government, much of the American public has shunned cigarettes. From 2001 to 2021, almost an epic period of time, the number of cigarettes sold in the US fell by more than half to just over 190 billion in the past year, according to data compiled by Statista.

Understandably, Altria is trying to move toward what it calls “a smoke-free future.” It will be anchored by NJOY, the e-cigarette brand it acquired in June 2023 for $2.75 billion in cash following the debacle that was its investment in troubled JUUL. The company was quick to point out in its latest quarterly earnings report that its shipment volumes for NJOY devices rose 80% quarter-over-quarter to 1.8 million units, and the brand’s market share rose 1.3 percentage points, to to 5.5%.

That’s impressive to a point, but then again, NJOY is a relatively new brand for Altria, and its mass rollout in this country only recently began. So it feels like those high shipment numbers are coming from a relatively low base. And while vaping has been a growing trend, it may not be the savior of the cigarette industry. Again, according to Statista, the estimated compound annual growth rate (CAGR) for e-cigarette revenue from 2024 to 2029 is 5.8%.

That’s certainly not a bad number, but it’s probably not enough growth to make up for the seemingly eternal decline in traditional cigarette sales. Altria’s second-quarter net income fell nearly 5% year-over-year, largely because of that.

Of production hunters and production traps

Most investors considering loading up on Altria or its publicly traded peers, such as Philip Morris International and British American Tobacco (BAT), are well aware of the challenges facing the industry. Still, they’ve rallied in all three companies of late, as the trio has significantly outperformed the S&P 500 year to date.

I think a lot of this popularity is due to yield; all three stocks boast high numbers, with Altria’s theoretical 7.7% only slightly outpaced by BAT’s 8%. Philip Morris is a latecomer among the three, but still offers an attractive 4.3% on its payout.

Yield-watching is all the rage these days, especially with Federal Reserve (Fed) Chairman Jerome Powell’s almost direct commitment to cut the regulator’s key interest rate in the near future. Because this rate is a benchmark for nearly every financial asset, investor payouts, such as bond coupons, tend to fall when rates fall. So it’s no wonder some market players are eager to get their hands on stocks with reliably high payouts.

In my opinion, this has left the share prices of tobacco traders inflated. It only exacerbates the secular decline in what is still very much their core business. I don’t think these price increases are sustainable and the industry as a whole is ready for a correction. Meanwhile, cigarette retailers aren’t the only high-yielding dividend stocks in town, far from it. One need only look at the real estate investment trust (REIT) industry, to name one example, to find solid companies with generous distributions.

It’s always tempting to jump into a company that has declared a dividend increase, especially if it’s raising an already ultra-high-yielding dividend. However, I think Altria qualifies as a yield trap these days. I wouldn’t be a buyer of the stock, especially over the long term.