1 Magnificent Dividend Growth Stock That Can Outperform the S&P 500

Investors seeking high-yielding dividend stocks with strong growth potential should consider Philip Morris International (PM). This tobacco giant has been transforming its business model, shifting towards smoke-free nicotine products, and delivering impressive results. With a current dividend yield of 4.4%, PM offers an attractive income stream while positioning itself for long-term growth.
PM's shift towards smoke-free products has been a game-changer. In Q2 2024, these products accounted for 38% of the company's revenue, growing at a 16.8% year-over-year rate. The company's leading brands, Iqos and Zyn, are driving this growth, with Iqos heat-not-burn devices and Zyn nicotine pouches gaining market share. This shift has led to a 20.2% increase in gross profit for the smoke-free segment, demonstrating the potential for continued growth.

PM's legacy cigarette business remains a stable cash cow, with consistent price increases driving sales growth. Overall cigarette prices have grown by 5% or more per year in 2022, 2023, and 2024, leading to an 8.6% increase in cigarette revenue last quarter. Even if nicotine consumers reduce smoking due to price hikes, PM can retain these customers through its leading nicotine pouch and heat-not-burn brands, ensuring stable profits.
PM's free cash flow growth trajectory is another key factor in its ability to raise dividends in the long term. With a dividend per share of $5.25, easily covered by its $6.46 in free cash flow per share, PM is well-positioned to continue increasing its dividend. The company's earnings growth prospects, driven by its smoke-free products and stable cigarette business, support this trajectory.

PM's international presence also enhances its dividend growth prospects. Operating in diverse regulatory environments and market conditions allows PM to mitigate risks and maintain steady earnings growth. As consumers shift towards less harmful nicotine consumption methods, PM's strong pipeline of new products and robust dividend growth strategy position it to outperform the S&P 500 in the long term.
In conclusion, Philip Morris International's transformation towards smoke-free nicotine products, stable legacy cigarette business, strong free cash flow growth, and international presence make it an attractive dividend growth stock. With a current dividend yield of 4.4% and a clear path to long-term growth, PM is well-positioned to outperform the S&P 500 and deliver substantial returns to investors.