The artificial intelligence (AI) narrative has put the stock market into overdrive. Nvidia is now one of the largest companies in the world by market cap. The S&P 500 is close to a price-to-earnings ratio (P/E) of 30, which has only happened before in the late '90s internet bubble and the 2021 COVID-19 pandemic bubble.
Despite this, there are many companies trading at reasonable or cheap prices that investors have seemingly forgotten about. I think these stocks -- especially those with high dividend yields set to grow -- have a good chance at beating the returns of the S&P 500 through the rest of this decade. Two stocks that fit this bill are Philip Morris International(NYSE: PM) and British American Tobacco(NYSE: BTI). Here's why I think now is a great time to add these high-dividend-yielding stocks to your portfolio.
Philip Morris International: Moving beyond tobacco
Created after a spinoff from the Philip Morris USA business in 2008, Philip Morris International is one of the largest tobacco companies around the globe and owner of the Marlboro, Chesterfield, and other brands. Unlike the United States, cigarette usage in Europe and other markets is not declining very quickly. That, combined with price increases to combat inflation and foreign currency movements, has enabled the company to post strong earnings growth from these legacy brands over the last decade.
But this isn't all that Philip Morris International owns anymore. Through internal investments and acquisitions, the company has entered the new-age nicotine market with less harmful products for customers. The important products in this category are Iqos, a heat-not-burn cigarette device, and Zyn, a nicotine pouch brand growing rapidly in the United States. Combine all these products together and Philip Morris International has 36.5 million customers for these new products.
Adding in these growth segments has changed the company's financial profile. Total shipment volumes are projected to grow 1% to 2% in 2024, with earnings per share (EPS) growing at 11% to 13% as margins expand and prices on cigarettes are raised. With plenty of room to grow these new nicotine products and the relative stability of the tobacco division, Philip Morris International should be able to compound earnings at over 10% or more for the next five years and beyond.
And yet, the stock still trades at a dividend yield of 4.4%, which is well above the S&P 500 average dividend yield of 1.3%. Poised for strong EPS growth, Philip Morris should be able to grow its dividend payouts at a consistent rate over the next five to 10 years and outperform the market.
British American Tobacco: Sky-high dividend payments
One of the highest-yielding stocks out there -- with almost twice the yield of Philip Morris International -- is British American Tobacco. Like its above counterpart, the company owns popular cigarette brands worldwide such as Camel and Lucky Strike. However, unlike Philip Morris International, British American Tobacco has more exposure to the United States market. And the market is struggling.
In the first half of 2024, British American Tobacco's combustibles volume declined by 12.5% year over year. It is able to counteract some of these declines with price increases, but it is still a large concern for the company and investors. This is why free cash flow per share has grown over the past five years, hitting $5.30 over the last 12 months.
British American Tobacco also has a "new categories" segment, with oral nicotine pouches and vapor devices leading the way. It has not been as successful in these alternatives compared to Philip Morris, but the segment is still on track to hit around $5 billion in annual revenue shortly and just reached positive segment profitability.
As the new categories continue to grow and become a benefit to consolidated earnings as opposed to a headwind, I think British American Tobacco can keep growing its free cash flow per share over the next five to 10 years even if the cigarette business continues to have major volume declines. At a dividend yield of 8.1% and trailing dividend-per-share payout of $2.90, there is plenty of room for management to expand this dividend yield in the coming years.
Add it all together, and I think British American Tobacco will likely outperform the S&P 500 over the next decade.
Should you invest $1,000 in Philip Morris International right now?
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Brett Schafer has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Nvidia. The Motley Fool recommends British American Tobacco P.l.c. and Philip Morris International and recommends the following options: long January 2026 $40 calls on British American Tobacco and short January 2026 $40 puts on British American Tobacco. The Motley Fool has a disclosure policy.
