4 Sinfully Good Tobacco Stocks For Dividend Lovers

Short-term treasury yields tumbled on diminished chances of a rate hike, thanks to the weakest August data for the service sector in six years. What’s more, manufacturing activity contracted during the same period, while pace of hiring slowed down.

With rates stuck at ultra-low levels, the best pick for investors are none other than tobacco stocks. Even though some may consider them as “sin” stocks, these are known to offer consistent and attractive dividend yields.

Service Sector, Treasury Yields Weak

According to the Institute for Supply Management, the non-manufacturing index dropped to 51.4 in August from 55.5 in July. The new-orders index tanked to 51.4 in August from 60.3 in the prior month – its lowest since the end of 2013. Likewise, the production index plummeted, while the employment gauge fell slightly.

As services account for a major portion of the economy, weak growth in the sector dims hopes of a rate hike in the near term. This led to a rise in treasury prices, dragging yields down. The yield on the 2-year Treasury note, which is most sensitive to rate-hike expectations, fell 5.8 basis points to 0.734%, its lowest since Aug 18. The 10-year Treasury note also fell 5.3 basis points to 1.544%, marking the lowest in two weeks.

Manufacturing Growth Dull

Manufacturing activity also fell in August for the first time since February. According to the Institute for Supply Management, manufacturing index dropped to 49.4 in August from 52.6 last month. Any reading below 50 indicates a contraction. Other key gauges on new orders, production and employment were also below the 50% mark.

The productivity of the American business and workers also fell 0.6% in the second quarter instead of 0.5%, according to the revised government figure. Weak factory sector data have also diminished chances of an imminent rate hike.

Jobs Data Discouraging

In fact, chances of a rate hike this month fell considerably after pace of hiring slowed down in August following huge gains in early summer. The non-farm payroll reading of 151,000 last month was well below the estimated 180,000 and the upwardly revised prior-month reading of 275,000. The unemployment rate was unchanged from the prior month at 4.9%, whereas analysts had expected the rate to fall to 4.8%.

Average hourly earnings on private non-farm payrolls inched up 0.1% last month and 2.4% from a year earlier to $25.73 in August. However, this was less than July’s annual gain of 2.7% – the best in seven years. August’s wage gains won’t fuel inflation, which remained short of the Fed’s target range of 2% for a considerable period of time. Reaching the desired inflation level is one of the primary requirements for a rate hike.

Hunting High-Yields? 4 Tobacco Picks

In the wake of such discouraging factors, investors should turn to tobacco stocks which promise tremendous yield statistically.

Though some investors may have reservations against buying such sinful stocks but cigarette companies make good investment choices as they have consistently maintained earnings growth by trimming expenses, seeking income abroad and through mergers and acquisitions.

The tobacco stocks listed below have some of the highest dividend yields in the industry, while they also come with a beta of less than 1, meaning the stock is considered less volatile than the market. Moreover, such stocks carry a Zacks Rank #3 (Hold), meaning their trend in earnings estimate revisions are in line with the overall market (read more: 4 Blue-Chip Dividend Stocks to Buy in September).

Altria Group, Inc. (NYSE:MO) is engaged in the manufacture and sale of cigarettes in the United States. Altria Group is the parent company of Philip Morris International Inc. (NYSE:PM) and is the owner of the world’s most popular cigarette brand, Marlboro. The company has a dividend yield of 3.38%. Altria Group’s 5-year historical dividend growth rate is 8.1%. The estimated earnings growth rate for the company this year is 9.4% (read more: Altria Rewards Shareholders with 8% Hike in Dividend).

Philip Morris has been increasing its dividend every year since it began paying dividends in 2008. The company has a dividend yield of 4.01%. Philip Morris’s 5-year historical dividend growth rate is 7.22%. The estimated earnings growth rate for the company this year is 2% (Read more: 4 Great Dividend Stocks in the Consumer Staples Sector).

Reynolds American, Inc. (NYSE:RAI) is the second largest tobacco company in the country and is known for brands including Camel, Kool, Pall Mall, Winston, Salem and Doral. The company has a dividend yield of 3.31%. Reynolds American’s 5-year historical dividend growth rate is 8.12%. The estimated earnings growth rate for the company this year is 17.4%.

British American Tobacco (LON:BATS) PLC (NYSE:BTI) could be a foreign stock option for some investors. The company is known for its Dunhill, Kent, Pall Mall and Lucky Strike brands. British American Tobacco has a dividend yield of 3.37% and a 5-year historical dividend growth rate of 3.83%. The estimated earnings growth rate for the company this year is 5.3%.

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