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Tobacco stocks could be the best pick for yield seekers

Here’s where to go to find yield: Traders

With rates stuck at ultra-low levels, times are tough for yield-seeking investors. However, some investors says a fiery set of equities offers a compelling opportunity to pick up dividends: Tobacco stocks.

Along with the well-documented health problems that come along with smoking, tobacco companies carry a stigma with the public. Yet the sector, according to Erin Gibbs, equity chief investment officer at S&P Global, is "another little industry that you can get some really sweet yields, about 4.5 percent."

The list of tobacco titans include Altria (MO), Vector Group and Philip Morris International. Altria has seen recent highs not seen since before the financial crisis, and the company offers about a 4 percent dividend yield.

"Tobacco is unique because there are a lot of people who don't invest into it," said Gerry Sullivan, portfolio manager of the Barrier Fund — formerly known as the Vice Fund. The firm focuses particularly on stocks associated with notable "vices," like smoking and drinking.

Tobacco typically "trades with a low beta; it doesn't go up as fast, not down as fast," Sullivan told CNBC in an interview recently.

"But I can't believe the yield is not a key component in an investor's interest in the stock, because if you would ask the majority of people, of what they think of tobacco stocks, they would say smoking is bad," Sullivan said. "But it comes with a tremendous yield statistically."

Marlboro cigarettes, produced by Altria Group
Jason Alden | Bloomberg | Getty Images

Tobacco stocks trade fairly normally, "until there happens to be, or what seems to be, say, a shock to the market. It just seems like we don't have those days anymore," said Sullivan, who owns shares of Altria, Philip Morris International and Reynolds American.

Adam Fleck, an equity analyst for Morningstar, agrees that the yield in tobacco names that would attract investors "in a low-yield environment."

Fleck, who recently gave Altria a hold rating, believes the stock is overvalued and said he sees its worth at about $59 per share — but that "their pricing value is still fantastic."

Altria, which owns tobacco giants Philip Morris USA and Marlboro, currently trades at about $67 per share, with a dividend yield of about 3.4 percent.

"The quality of the company is certainly not in question," said Fleck in an interview with CNBC recently. "It's a leader in tobacco with terrific profit, and has a fantastic brand in Marlboro."

Yet Brian Kelly of BK Capital said Thursday on "Trading Nation" that to find substantial yields, he would look to a different sector.

"Utilities, tobacco — those are fine," said Kelly. "But I would look at the financials, too."

The financials ETF has a dividend yield of about 2.6 percent.