Is Altria's 7.4%-Yielding Dividend Safe?

Dividend stocks can be alluring for investors, especially ones that offer high yields. As interest rates come down, stocks that offer high payouts can provide investors with a lot of incentive to just buy and hold and collect dividend income.

But the risk that often comes with pursuing high yields is that they might not end up lasting. If a dividend proves to be unsustainable, a company may not have much option but to cut or suspend the dividend in the future. If that happens, then not only could your dividend income disappear, but the stock could suddenly go into a free fall.

Altria Group (NYSE: MO) is one of the highest-yielding stocks on the S&P 500, as it pays investors 7.4%. That's more than six times higher than the S&P average of 1.1%. It's an incredibly attractive yield, but the big question for investors is whether it's safe.

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Altria has a fantastic track record for paying dividends -- but does that matter?

When dividend investors look at potential stocks to buy, they often focus on stocks that have been paying dividends for a long time and that have excellent track records. Tobacco company Altria certainly falls into that category. It has increased its dividend 60 times in 56 years. It falls into the exclusive category of Dividend Kings.

But that only tells you about what it has done in the past; by no means is that a guarantee that the dividend will continue to expand in the future. Investors need to consider more than dividend history to assess whether a stock is a good one and whether its payout can be relied upon.

The big problem with Altria is its lack of growth

If a business isn't growing and its future prospects don't look encouraging, it can be a sign of trouble, even for a dividend stock that may not be primarily focused on growth. That's because if its earnings are diminishing or even stagnant, that can make it difficult for the company to pay and grow its dividend while also investing in its operations. And in recent years, Altria has struggled with generating any type of positive sales growth.

MO Revenue (Quarterly YoY Growth) data by YCharts

The company's diversification efforts into offering oral tobacco products haven't been paying off. Meanwhile, smoking rates have been declining for years, and that creates question marks about where the business might be in five or 10 years.

If there's not a great degree of confidence in its future, then it may not matter a great deal that Altria's payout ratio is around 80% and that the dividend looks sustainable today. If things are likely to get worse for the company in the future, the dividend may still not prove to be safe.

There are far better options than Altria

Simply looking at ratios and earnings numbers can prove to be perilous for dividend investors in the long run because what matters most is the big picture, and assessing where the company is likely headed in the future. That can't necessarily be measured by looking at financial statements and instead involves some qualitative analysis. This is where Altria can change from being a safe dividend stock to a potentially risky one.

The stock has rallied in recent years, but over the past decade, its returns have been flat, as investors grew concerned about Altria's future and rightfully so. Ultimately, with so many other quality dividend stocks to choose from, Altria is not one I'd consider buying, as there can be a great deal of downside risk with this investment.

David Jagielski, CPA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.