No stock better exemplifies the incredible power of dividends than Altria (NYSE: MO). The parent company for Marlboro cigarettes in the U.S. has enjoyed fantastic returns over the past 30 years -- 4,140%, to be exact. That's more than quadruple what the S&P 500 returned over the same time frame.
But if we include the effects of reinvesting the company's dividend along the way, the effects are truly amazing.
MO data by YCharts
That's right, your eyes aren't deceiving you. If you invested just $1,000 in Altria 30 years ago, and reinvested dividends along the way, your account would now have $3.64 million today.
But does that mean that Altria's stock is a good investment today, and that its dividend is just as powerful as it once was? Let's investigate those two questions below, and see if the same potential exists today, or if you're living dangerously by investing with the company today.
Image source: Getty Images
How strong is the company?
First, we'll see how strong Altria is as a company. The two most important things to know are that smoking rates are declining in the United States -- where Altria principally operates -- and that Marlboro, Altria's top brand, is the most popular cigarette in the country.
Last year, Forbes rated Marlboro as the strongest brand in tobacco worldwide, with a value of $24 billion. Incidentally, that was good for 25th place out of all brands, ahead of household names like Visa, Pepsi, and Starbucks. That matters because even though smoking rates have declined, Altria has been able to raise prices without losing customers.
Image source: Getty Images
Additionally, Altria has exposure outside of cigarettes. The company's MarkTen e-vapor product has now reached over 13% of market share, and it also has exclusive U.S. rights to iQOS smokeless, heated tobacco systems.
In general, increased scrutiny and declining smoking rates actually help the industry's strongest players, chief among them Altria. That's because competitors have a harder time breaking through Altria's brand strength and are disincentivized to enter the market because of regulatory hurdles.
That makes me believe that Altria will likely continue to dominate the industry for years to come. That being said, there is a point at which the company can no longer offset smoking declines by simply increasing the price at convenience stores and other retail outlets.
About that dividend...
When it comes to dividends, there's no metric more important to watch than free cash flow. This represents all of the money that has come in through a company's operations, minus any capital expenditures. It is from free cash flow that dividends should ideally be paid, and monitoring their relationship is key to making good dividend-stock decisions.
Here's how the two have fared over the past four years.
Data source: Yahoo! Finance. All figures rounded to nearest $100 million
It's important to note that the 2017 figures are just for the first nine months of the year. We have yet to hear from management regarding what the fourth quarter produced.
In general, you don't want to see a company offering up more than 85% of its free cash flow for a dividend. But because the capital expenses involved with making cigarettes are so small, Altria can routinely -- and safely -- afford to push that envelope, as it did in 2016.
Over the past nine months, roughly 88% of Altria's free cash flow has been used to pay its current 3.8% dividend yield. Management expects the company to be able to grow earnings -- and thus the dividend -- by about 8% to 10% over the foreseeable future. That means that dividend payouts should continue climbing as well.
If you're a dividend investor nearing retirement, I think it's worth devoting at least a small part of your time to researching Altria. It has the industry's most powerful brand, and it spits out a large dividend. Personally, I have over three decades until I hit retirement age, and have doubts about how far cost-cutting -- and price-raising -- measures can go over that time, so I choose not to hold the stock, or make a call on my All-Star CAPS profile.
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Brian Stoffel owns shares of Starbucks. The Motley Fool owns shares of and recommends Starbucks and Visa. The Motley Fool has a disclosure policy.