An unpopular commodity stock paying a 6.4% dividend

• I'm not proud of this recommendation, but...
• A solid investment
• Just don't tell your spouse about it

I've written about unpopular, unloved and/or ignored commodities before - like lead, uranium, alcohol and farmland - even marijuana.

We can argue about the merits and drawbacks of being a responsible citizen-investor with regard to those commodities, but I don't think there's a person alive who really feels proud to invest in the topic of today's article. And trust me, I've heard from some squeaky wheels when I write about these types of topics.

And while it might be true that there's a certain degree of 'right' and 'wrong' that we need to grapple with when it comes to investing, it's my sole job as the author of this publication to bring quality investment opportunities to your attention.

I make no statement or value judgment about my personal feelings towards this commodity I'm about to mention or the company that sells it - I'm just doing my job. In fact, I've avoided writing about this topic for the very reason that it's icky. It's almost universally viewed as "bad." Popular opinion could scarcely be worse.

And for that reason, it's exactly the type of investment you want to own.

I'm talking about tobacco.

The company in question is Altria Group Inc. (NYSE: MO).

Let's pretend for a minute that we don't all have a relative or a friend who is a smoker, or has died from a lung cancer or emphysema, or that cigarettes are even in the equation.

Altria pays a 6.4% dividend and sells for less than 14 times trailing earnings. Their target dividend payout is 80% of earnings per share, which means they have a strong policy of passing on profits to shareholders.

They have a long history of paying dividends, and they're nominally lower today as the result of spinoffs in 2007-2008 with Philip Morris PM and Kraft KFT .

(You can look at their entire 21 year dividend history at this link.)

On average, they raise their dividend just about once a year - and most recently they increased their dividend by 8.6% a few weeks ago on August 27, 2010.

They're a blue-chip company by any measure. With a market cap of nearly $50 billion, they're one of the top 100 largest companies in the stock market.

Those are strong trends - but you'd be rightly concerned about their ability to continue to pay dividends in a culture and climate where cigarettes are becoming less socially acceptable in the United States.

[Ed. Note: I've made the common mistake of confusing Philip Morris PM with Altria MO - so I've amended this editorial to reflect more accurate statements about Altria - which despite it's lack of reach into Asia, I still think is a better buy right now.)

But Altria is more akin to a state-protected monopoly than any other company in this country right now. That's because they've been gifted some very favorable tax and regulation policies that make it near-impossible for any competitors to get a foothold.

Think about it: Altria is already the biggest and most profitable tobacco country in the United States. Taxes on tobacco are huge. Regulations are as strict as they come. Do you want to open a tobacco company, and have to contend with someone who is already wildly profitable in such a restrictive marketplace? I sure don't.

And while I'm sure Altria's board wished they didn't have to pay so much in taxes, they probably also realize that the business has been given an incredible protective moat by the Federal Government, which allows they to stay on top.

That's not likely to change. Altria is the biggest cigarette company in the United States, and they sell the most popular brand of cigarette: Marlboro.

Of course, they also sell Virginia Slims, Parliament cigarettes, as well as smokeless tobacco products under the Copenhagen, Skoal, Red Seal, and Husky brands, in addition to machine-made large cigars and pipe tobacco.

There's practically no good reason not to own this company...except for maybe the fact that it's an evil tobacco company.

My wife thinks that's a good enough reason not to own this company. She makes a face whenever I bring up the idea of buying some shares, just like most people make a face when you talk about this company. So unfortunately, I don't own any shares.

But that doesn't mean it's not a great investment. I'd suggest buying shares of Altria under $25 a share. That will lock in a dividend of over 6%, and let you buy this company at less than 15 times earnings.

As always, do your own research to decide if the opportunity is right for you, and maybe don't tell your spouse or friends about this one...

Good investing,

Kevin McElroy

Editor

Resource Prospector

disclosure: no position