It might not seem like it today with market indexes rocketing to all-time highs, but bear markets do exist. They happen around once a decade and are defined as a period when an index such as the S&P 500 falls 20% or more from all-time highs.
One happened in 2022 (it seems so long ago) as well as briefly in 2020. Before that, there were bear markets in 2009, 2001, and 1990.
When stock prices are soaring, it can feel like the time to put your foot on the gas and get more aggressive with your portfolio. But counterintuitively, it is the best time to get more conservative and mix in some stocks that can weather any recession or bear market. You don't want your entire portfolio in risky hypergrowth technology stocks that can fall 80% in a market downturn. Many investors made this mistake in 2022.
Dividend stocks with high yields can be great ballast in your portfolio when preparing for an upcoming bear market. One of the top-yielding stocks is Altria Group (NYSE: MO) . Here's why it is an ideal choice to balance out a portfolio of expensive hypergrowth stocks.
Legacy tobacco and pricing power
Altria Group is the corporate owner of Philip Morris USA, which owns brands such as Marlboro and Copenhagen. Cigarettes power the boat for the company, with Marlboro leading the way. However, smoking has been going down in the United States for many years.
Although this is a concern for tobacco companies, Altria has been able to counteract these volume declines with price increases. Revenue is up 13.1% in the last 10 years, while operating income is up 50% cumulatively over that time period.
This is why Altria has been able to consistently raise its dividend per share -- most recently by 4.1% to $1.02, its 59th increase in 55 years.
At a current yield of 8%, Altria Group looks like an attractive income stock if it can keep raising prices -- and therefore its dividend payout. The big questions are whether this party can continue, and whether management can switch customers over to nicotine alternatives.
Can the company switch customers to other product categories?
Pricing power is great, but it can't sustain Altria Group indefinitely. Eventually -- if the trends of the last few decades persist -- cigarettes will be a minuscule part of consumer spending in the United States.
Replacing cigarettes are vaping devices and nicotine pouches. Altria Group has invested in both with its Njoy and on! brands.
Both brands are growing, but still are below direct competitors. On! nicotine pouches have 8.1% market share of the oral tobacco market (including legacy chewy tobacco and new nicotine-pouch brands), while Njoy held just 5.5% of the vaping market in the United States. Combined, the two brands still form just a small portion of Altria's consolidated revenue.
Over the next five to 10 years, shareholders will need to keep track of the growth of these two brands. They can help replace sales volume lost from people quitting cigarettes.
MO PE ratio data by YCharts; PE = price to earnings.
Buy it for steady returns and low volatility
Altria Group is not a high-growth company. In fact, I wouldn't expect its revenue to grow much over the next five years. Cigarette volumes will keep declining, which Altria can counteract with price increases and growth from on! and Njoy. But at current prices, I don't think you need much revenue growth for the stock to do well.
It has a price-to-earnings ratio of just 8.5. The company is repurchasing a ton of its stock, which means it can grow its dividend per share without growing its nominal dividend payout.
The starting yield is around 8% today, and the company has a long history of growing its dividend per share. This means that even if the stock price goes nowhere -- or falls in a bear market -- investors will be getting a consistent 8% yield.
For all these reasons, I think Altria Group is a cheap stock you would love to own during the next bear market, whenever it arrives.
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Brett Schafer 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 .
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