With the Fed on the verge of cutting its policy rate in September, Wall Street is on the lookout for high-dividend stocks. Bond yields are coming down, which means less income for bond buyers. That’s a big reason why cigarette and smokeless tobacco marketer Altria Group (NYSE: MO) is up 28% so far this year.

A quick look at Altria’s stock chart illustrates the trend towards income stocks. Four months ago, MO was trading below $41. This week it broke above $53 for the first time in over three years.

The last time Altria was this popular on Wall Street, the coronavirus pandemic ignited a surge in global cigarette sales. Most employers do not allow smoking at their workplaces. However, there’s nothing to stop someone from lighting up a cigarette in their backyard while they are forced to work from home.

This time, Altria’s newfound affection on Wall Street is due to its focus on increasing profits instead of attempting to diversify away from tobacco products. The company has jettisoned several underperforming businesses that resulted in big losses that hampered its profitability.

That is no longer the case. Altria’s fiscal 2024 Q2 results released last month included an 86% jump in diluted earnings per share (EPS) on a year-over-year basis. As my high school football coach liked to say, put that in your pipe and smoke it!

Promises Kept

Ever since Billy Gifford took over as Altria’s CEO five years ago, he has been narrowing the company’s focus. At that time, Altria was a mess. Since then, he has been systematically selling off underperforming assets unrelated to the tobacco business while investing in smokeless tobacco.

It hasn’t been easy. Despite assurances from Gifford that he would remain true to his vow to improve Altria’s operating metrics, Wall Street wasn’t buying it. They also weren’t sure that Gifford would deliver on his promise to share Altria’s cash flow with them in the form of higher dividends.

Those fears have been dashed. Since Gifford took over in 2020, Altria’s dividend has increased its dividend every year. Its current quarterly cash dividend of 98 cents per share equates to a forward annual dividend yield of 7.7 percent.

Usually, a dividend yield that high means that Wall Street believes that a dividend cut might be in the offing. However, Altria’s payout ratio of 68 percent is sustainable given the company’s enormous cash flow.

In this case, Altria’s high dividend yield suggests that Wall Street does not believe that the company can continue increasing profitability at its recent pace.

That may prove true, but Altria’s guidance for EPS growth of 2.5 percent to 4.0 percent this year is still a solid number. If it can increase its dividend payment at a comparable pace, the company’s shareholders should be very happy.

Enhanced Income

Despite Altria’s solid second quarter, the analysts on Wall Street that follow the company are not optimistic. Their average one-year price target for the stock is $50.34, which is about 5 percent lower than it is now.

The options traders are equally pessimistic. A few days ago while MO was trading around $53, the call option that expires on December 20 at the $50 strike price could be bought for about $4.

That means they don’t believe there is much capital appreciation left in the stock over the remainder of this year. Of course, they thought the same thing four months ago before MO shot up the charts.

If they are right this time, then Altria shareholders looking for more income may want to consider selling a call option against their shares. If the stock continues to rise, then their shares could be called away from them at the stirk price.

In the example above, that means they would receive $50 for each share of MO plus the $4 option premium. If MO turns around drops below $50, then they get to keep their shares plus the $4 option premium.

That strategy is known as covered call writing. It is one of the few ways I know of for investors to enhance their income without spending any money at all.

There are other ways of using options to increase income. In a new presentation, my colleague Jim Fink can show you how to receive regular payments of $2,950 or more. He calls it his “I.V.L. System” and it generates winners at an astonishing clip.

Jim Fink is the chief investment strategist of Options for Income. Every week, he’ll send you easy-to-follow instructions that’ll put you on Wall Street’s payment list. You’ll get the money right away, up-front, in your trading account. Want to earn life-changing income? Click here.