Vector Group Ltd. (NYSE:VGR) produces and sells a variety of discount cigarette brands. Some of their more popular cigarette brands includes Pyramid, Grand Prix, Liggett Select, Eve and USA. In addition, the company also has some real estate operations through their ownership of New Valley LLC.
New Valley owns a residential real estate brokerage firm and also holds some investment properties. However the real estate operations only account for around 10% to 15% of VGR’s revenue. So the company is still mainly a tobacco company.
VGR is a small tobacco company with a market cap of only around $1.4 billion when compared to the tobacco giants such as Altria Group, Philip Morris International, Reynolds American, and Lorillard. In general many tobacco stocks do pay high yields but VGR has the highest yield of them all. The dividend yield is currently around 9.35% with its $1.60 per share dividend.
In addition in every year in September since 1999, VGR has also been paying out a 5% stock dividend. This means for every 20 shares of VGR you own, you would receive 1 additional share of stock. The high yield and annual 5% stock dividend is what mostly attracts investors to the stock.
Those looking for capital appreciation in a tobacco stock should stick with the large tobacco companies. The only reason for owning VGR really is the dividend. There have been many that have been saying that the dividend for the stock is unsustainable for many years now but the company has been able to manage to continue it’s payout of $1.60 per share since the year 2000.
While we don’t expect a dividend increase anytime in the near future, the 5% annual stock dividend actually translates to a 5% dividend increase every year if the company can maintain the dividend level. To clarify, say for example you purchased 100 shares of VGR. You would collect $40 in dividends a quarter (100 x $0.40) and in September you would receive the 5% stock dividend. After receiving the 5% stock dividend you would own 105 shares of VGR. Therefore the next 4 dividend payments after getting the stock dividend would now be $42 (105 x $0.40). This effect compounds every year.
That being said we won’t recommended owning a large percentage of VGR in your portfolio. However a small amount of say around 5% to no more than 10% of your portfolio may be a worthy risk for those looking for a higher yield than other tobacco stocks.
Estimated Annual Dividend Per Share: $1.20 plus 5% stock dividend in Sept
Current Yield as of 8/28/2012: 9.35%
Dividend Payout Frequency: Quarterly
Ex-Dividend Dates: Around the 15th to 18th of Mar, Jun, Sept, and Dec
Payment Dates: Around the 28th to 30th of Mar, Jun, Sept, and Dec
Disclosure: We are currently long Vector Group (VGR)