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Dividend investors often get so enamored of a high yield that they overlook a company's underlying problems. That is quite possibly what happened with Altria (NYSE: MO) in the first half of 2024, a period in which the stock rose 13%, roughly matching the gain of the broader market. The thing is, Altria's most important business, its deeply troubled cigarettes operation, isn't likely to have seen a material change in direction in the first half.

A big yield for a reason

Altria's dividend yield is a huge 8.5% today. It was higher than that at the start of 2024, when the stock price was nearly 15% lower. A huge yield is the big attraction for most investors with this stock. Notably, the dividend has been increased regularly so there's a trend here that suggests the dividend is strong. And, in fact, there's no reason to believe the dividend is at risk of a cut in the near term.

The problem with Altria is the long term. The tobacco company has been dealing with a massive and ongoing decline in its cigarette production that it really has no way to stop. To put some numbers on that, Altria produced 116.6 billion cigarettes in 2017 and just 76.3 billion in 2023, which amounts to a 35% decline, with drops every single year across the span. There's a shift away from smoking cigarettes playing out, and it isn't likely to stop anytime soon.

Altria has been offsetting the declining volume with price increases. That's allowed it to keep supporting its dividend, but at some point higher prices are likely to exacerbate the volume declines. What the company needs to do is find a new business that it can grow.

Will NJOY be the winner?

Altria tried investing in vape maker Juul and in a marijuana grower, too. But neither of those deals worked out, and they ended up costing shareholders billions of dollars in write-offs. That said, the company knows it has to do something, and it has tried again with the purchase of vape maker NJOY. NJOY is further along in the development process than Juul was when Altria invested, so it seems likely that the outcome with NJOY will be better.

There have been some notable and positive developments, too. The most recent of those was NJOY receiving FDA authorization for menthol-flavored vape products. So there is a reason to be excited by the prospects here. But investors have to understand the scale of the problem Altria is tackling. In the first quarter of 2024, Altria's tobacco business, which is mostly cigarettes, generated $4.9 billion in sales. That was roughly 88% of the company's total sales of just under $5.6 billion.

MO data by YCharts

Even if NJOY turns out to be a big winner, the best that investors can hope for is that it will offset the declines taking place in the cigarette operation. The cigarette business is so big that it dwarfs the positives taking shape elsewhere in the portfolio. It will likely take years before any of the company's other businesses (it also sells things like nicotine pouches) will be large enough to make a dent in the downturn the cigarette business is facing. The ongoing cigarette price increases are really just buying Altria time, but, as noted, this tactic isn't a long-term solution.

Tread with great care

It is understandable that dividend investors would find Altria's stock interesting. The company has been making some progress within its noncigarette operations, as well. But don't let a short-term bounce in the stock lead you to believe that something material has changed with the company's business. The cigarette division is still huge and is still declining.

If you are looking to generate a reliable income stream to support your passive income needs in retirement, you need to watch the cigarette volume trends because, for the foreseeable future, that is what will determine Altria's ability to keep paying the dividend. In the second half of 2024 it is highly likely that cigarette volumes will continue to decline.

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Reuben Gregg Brewer 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.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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