The 6 Most Controversial Income Stocks on the Market
The secret is out. As an investment, sin wins.
Most companies engage in what we think of as “respectable” businesses like building computers, selling appliances or discovering new cures for diseases.
But there are companies that aren’t so squeaky clean. These so-called “sin” stocks are shunned by lots of investors. These are companies that sell booze and cigarettes, operate gambling casinos and offer adult-themed entertainment.
Criticize these businesses all you want, but the vices they sell never go out of fashion. Cigarette manufacturers reported healthy profits during the recession: America’s large tobacco companies recorded sales gains of more than +20% in 2009. Similarly, liquor sales by volume actually climbed by +1.4% last year, led by +5% gains in tequila and vodka consumption.
And when you can sell a product in good times and bad, that predictable demand can mean enormous amounts of cash flow, which often translates into stable or growing dividends.
With this in mind, I’ve put together a list of high-yield stocks that have controversial ties. You may or may not be embarrassed to admit owning these companies, but their generous dividends make them difficult for income investors to resist.
Lorillard, Inc. (NYSE: LO)
The many health risks associated with tobacco use are well-known. Yet tobacco companies remain some of the strongest cash generators and most generous dividend payers. A typical example is Lorillard — America’s oldest and third-largest tobacco company. The company was actually founded in 1760, 16 years before the Declaration of Independence. Lorillard makes Newport, the number one selling menthol brand in the United States, as well as Kent, True, Old Gold and nearly 40 other brands.
Lorillard has raised its dividend twice since being spun off from Loews (NYSE: L) in 2008. The latest increase was by +12.5% in August, adding up to a $4.50 annual dividend per share.
Altria Group (NYSE: MO)
Most investors are familiar with tobacco giant Altria, which produces the well-known Marlboro brand. In 2009, Altria Group diversified its business by acquiring two major smokeless tobacco brands, Copenhagen and Skoal, along with Ste. Michelle, a premium wine business.
Altria is among a select group of companies that have posted 20-plus consecutive years of dividend increases. The company’s relentless focus on cost-cutting boosted profits by +20% this year and made more cash available for dividends, which have already increased +11.8% in 2010. The current annualized dividend is $1.52 per share, equating to a of more than 6%. Altria shares have returned +30% this year, about three times the rate of the S&P 500.
World Wrestling Entertainment (NYSE: WWE)
Not every controversial stock is one that sells cigarettes or tobacco. World Wresting Entertainment is the company behind hugely popular wrestling events that include vulgar language, extreme violence, and sexual content. In addition to ticket sales, WWE earns major revenue from pay-per-view television, film, music and product licensing.
World Wrestling Entertainment had a decent record of dividend growth, including four increases in seven years, but the company has not raised the dividend since 2007. Revenue is down -1% this year, and the only reason aren’t lower is because of big expense cuts. At present, World Wrestling isn’t covering its $1.44 annual dividend — the payout is nearly two times earnings. However, the company has $84 million in cash and little debt, which suggests a dividend cut is unlikely.
Total SA (NYSE: TOT)
Some businesses are controversial not for their products, but for the company they keep. A case in point is French oil and gas giant Total SA. Total SA has been a major investor in Iran and actively involved in helping that country develop its oil and gas assets. Because of its activities in Iran, this company was facing sanctions from the American government. Total SA finally yielded to the pressure in September by announcing plans to curtail its Iran operations.
Total SA has oil, gas and chemical businesses and operates 24 refineries worldwide. In the first nine months of this year, Total SA grew production by +6% and profits by +36%. Cash flow from operations exceeded $9 billion. Despite this impressive performance, shares are down -14% for the year. In the past three years, Total SA has hiked dividend payments +7% annually to a current annual rate of $3.17. Beginning next year, the company will switch from semi-annual to quarterly dividend payments.
Diageo plc (NYSE: DEO)
Despite the significant health risks associated with alcohol consumption, the major distillers are prospering. Diageo plc is the world’s largest producer of premium spirits and owns 17 of the top 100 premium distilled spirit brands. The company’s premium brands include Johnnie Walker scotch, Smirnoff vodka, Captain Morgan rum and Guinness beer.
Diageo holds 30% of the worldwide market for premium sprits. The company’s fundamentals are strong, with five-year growth in sales, earnings and cash flow ranging from +4% to +8% annually. Diageo has raised distributions for more than a decade, with annual growth in the last five years exceeding + 5%. The payout is also a comfortable 60%. This September, Diageo increased the distribution by +6% to a $2.96 annualized rate.
Action to Take –> Conservative investors should consider adding Altria to their portfolio. This company generates sizable cash flow, has a 20-plus year track record of dividend growth and currently yields 6.1% — among the highest yields in the tobacco stock group. For more aggressive investors, I recommend Total SA (NYSE: TOT). Total offers a solid of 5.1% and will benefit from rising energy prices as the world strengthens.
P.S. Investing in dividend-paying stocks is one of the most profitable ways to beat the market. For more on stable stocks that will grow your money with ever-increasing dividends, see Carla Pasternak’s latest course, The 5 Rules Every Income Investor Has to Know.