Dividend stocks have come under fire of late as investors have started paring down their equity investments, which may have been treated like bonds. The risk of rising interest rates may be just too high for some investors. Sometimes investors get to see something that just sounds and feels silly in the markets. That is the case in the world of high dividends right now. Investors are willing to accept a lower dividend from Altria Inc. (NYSE: MO) than they are from AT&T Inc. (NYSE: T).

Is it possible that investors are more willing to accept the risk of a top tobacco stock compared to a telecom giant? For now, the answer is yes. It is obvious that neither sector is exactly full of growth. And for the moment, it seems that the tobacco play actually may be more defensive than the telecom play. This is one situation where relative value is close, but the marketplace’s opinion could sway ahead. AT&T is the best-paying dividend and highest dividend in the Dow Jones Industrial Average.

AT&T Inc. (NYSE: T) trades at $35.60, and the $1.80 annualized dividend generates a yield of 5.05%. AT&T’s 52-week trading range is $32.71 to $39.00, so shares are currently down more than 8% from the 52-week high. Analysts have a consensus price target of $37.85, and that implies about 6.3% upside. AT&T trades at 14.2 times expected 2013 earnings of $2.61 per share on earnings growth of about 8.6%. AT&T’s sales are expected to grow at only 1.2% to $128 billion, and its market cap is $191 billion.

Altria Group Inc. (NYSE: MO) trades at $36.40, and the annualized $1.76 dividend generates a yield of 4.83%. Big Tobacco’s 52-week trading range is $30.01 to $37.61, so shares are currently down about 3% from the 52-week high. The consensus analyst price target of $37.33 implies upside of only about 2.7%. Altria trades at about 15.2 times the expected $2.40 in earnings per share on about 8.5% earnings growth. Altria’s expected annual sales in 2013 are projected to be up only 0.6% to $17.6 billion, and its market cap is about $73 billion.

What is so interesting here is that both companies are defensive by nature for investors. Both are also very slow growth plays, with earnings growing more than sales. Both companies are using the bond market’s low rates to get their long-term investment plans locked in with very low fixed capital costs for the next generation.

The problem with these companies is that both face large hurdles. Altria faces declining cigarette case volume sales, and it is late to the e-cigarette market compared to its peers. AT&T faces tough growth prospects, and likely a perpetual slide in the core landline operations that the younger generation lives without.

If we look at the top competing plays for each, the difference becomes even more stark. Reynolds American Inc. (NYSE: RAI) is a distant number two with a market cap of just under $27 billion, and it generates a 5.15% yield versus 4.83% for Altria. Verizon Communications Inc. (NYSE: VZ) is fairly far behind AT&T’s market cap at $140 billion, yet it pays a far lower dividend of 4.2% to its common stockholders.

We included a yield graph chart from Ycharts.com to show the relative yield history. This chart goes back to the start of 2010. We would have used a longer-term chart, but this was greatly skewed during the Great Recession as yields and prices of most stocks got out of whack with reality during the market crash. We expect both companies to keep raising their payouts, but the question is for how long endless dividend hikes can keep coming if sales and earnings cannot be maintained because both have high payout ratios.

The historical chart does not exactly tell you that Altria is going to die just because its yield is less than that of AT&T now. It just seems odd that investors would demand a higher dividend from the largest telecom versus the largest domestic tobacco player.

Thank you for reading! Have some feedback for us?
Contact the 24/7 Wall St. editorial team.