Best Stock to Buy Right Now: Realty Income vs. Altria

Realty Income (NYSE: O) and Altria (NYSE: MO) are both popular stocks for income investors. Realty is one of the largest real estate investment trusts (REITs) in the world, it pays monthly dividends, and it's raised its payout 127 times since its IPO in 1994. Altria is the largest tobacco company in America, and it's boosted its quarterly dividend Altria has increased its shareholder dividend for 54 consecutive years, making it one of very few stocks to earn the title Dividend King.

Realty Income pays an impressive forward dividend yield of 5.5%, while Altria pays an even higher yield of 7.2%. After including reinvested dividends, Realty's total return of 105% also lagged Altria's total return of 119% over the past 10 years. But before we assume Altria is a better dividend play than Realty Income, let's look forward instead of back to see which is the better dividend investment.

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Realty Income will benefit from lower interest rates

As a retail REIT, Realty Income buys up properties, leases them to businesses, and splits the rental income with its investors. Like other U.S. REITs, it's required to pay out at least 90% of its taxable income as dividends to maintain a favorable tax rate.

Realty owns 15,450 properties worldwide, and it serves more than 1,500 clients across 90 separate industries. It's a triple net lease REIT, which means its tenants are responsible for the property's real estate taxes, insurance, and maintenance fees.

Realty's diversification, scale, and cost-efficient business model enabled it to grow its adjusted funds from operations (FFO) per share at a compound annual growth rate (CAGR) of 5% from 2013 to 2023, even as its tenants weathered the pandemic, inflation, rising interest rates, and other macro headwinds.

Some of Realty's top tenants, most notably Walgreens Boots Alliance and Dollar Tree, have been struggling with slowing sales and store closures. But it still maintained an occupancy rate of 98.7% in its latest quarter as its stronger tenants, like Walmart and Dollar General, opened more stores to offset that pressure.

Rising interest rates hurt Realty Income and other REITs by making it pricier to buy new properties and discouraging retailers from opening new brick-and-mortar stores. They also drove more income investors toward risk-free CDs and T-bills. But as interest rates decline, more investors should pivot back toward market-leading REITs like Realty Income. At $58, it still looks reasonably valued at less than 15 times last year's AFFO per share.

Altria still faces existential challenges

From 2013 to 2023, Altria's adjusted earnings per share grew at a CAGR of 8%. But during that same period, its annual cigarette and cigar shipments fell from 129.3 billion sticks to 78.1 billion sticks. Its retail share of the cigarette market also slipped from 50.6% to 46.9%. Those declines were caused by plummeting smoking rates in the U.S., rising excise taxes, competition from smaller brands, and the rise of e-cigarettes and other vaping products.

To counter that pressure, Altria repeatedly raised its prices, divested its non-core businesses, cut costs, and bought back more shares to grow its EPS. However, that strategy will run out of steam unless it finds fresh ways to grow its revenue -- which only grew at a CAGR of 3% (net of excise taxes) from 2013 to 2023.

Altria's best hope is to sell more smoke-free products like snus, nicotine pouches, heated tobacco devices, and e-cigarettes, but those efforts have been costly and messy. It invested $12.8 billion in the e-cigarette maker Juul in 2018, but that investment withered after the U.S. Food and Drug Administration (FDA) banned all of Juul's products in 2022. To recover from that setback, Altria bought the e-cigarette maker NJOY for $2.8 billion in 2023. But that acquisition won't be accretive to its cash flow until 2025 or its EPS until 2026.

At $58, Altria trades at just 10 times last year's earnings. Analysts still expect its EPS to grow at a CAGR of 5% from 2023 to 2026, so its business won't collapse anytime soon. But looking further ahead, Altria's future arguably looks murkier than Realty Income's.

The better buy: Realty Income

Altria pays a bigger dividend, but it could run out of room to hike its cigarette prices and cut costs to offset its declining shipments. It could also struggle to expand its non-smokeable businesses fast enough to diversify its business and grow its sales.

Realty's growth was throttled by rising interest rates in 2022 and 2023, but those headwinds will dissipate as those rates decline. Its business model also doesn't face any major existential challenges. So for now, I believe Realty Income is a much better long-term income investment than Altria -- even if it pays a lower yield.

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Leo Sun has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income and Walmart. The Motley Fool has a disclosure policy.