Cannabis and dividends go together like... Actually, cannabis and dividends usually don't go together at all. There's this tiny little problem that most cannabis companies aren't profitable yet that keeps any discussion of dividends totally off the table.
However, there are a handful of cannabis stocks that do pay nice dividends. The three with the highest dividend yields are Altria Group (NYSE: MO), Molson Coors Brewing (NYSE: TAP), and Scotts Miracle-Gro (NYSE: SMG). You might not view these three as cannabis stocks, but thanks to key deals each of these companies has made, that's what they are.
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Altria is best known for its tobacco products such as Marlboro cigarettes and Skoal smokeless tobacco. The tremendous cash flow generated by these and other products enables Altria to pay out a dividend that currently yields 6.52%.
In December 2018, Altria announced that it was investing $1.8 billion in Canadian cannabis producer Cronos Group (NASDAQ: CRON). The deal gave Altria a 45% stake in Cronos with warrants to gain a majority interest in the company. Altria also won the right to nominate four of the seven members of Cronos' board of directors.
Sales are falling for Altria's core tobacco business, with revenue plunging 6% year over year in the first quarter. The big investment in Cronos provides Altria with an opportunity to expand beyond tobacco, something that the company is eager to do.
In the meantime, Altria's mouth-watering dividend appears to be relatively safe. The company uses around two-thirds of its free cash flow to fund the dividend program, leaving plenty of room to keep the dividends flowing.
2. Molson Coors
Molson Coors ranks as one of the top beer makers in the world with its Miller Lite and Coors brands leading the way. The company's dividend yield currently stands at 2.98%.
Last year, Molson Coors teamed up with HEXO (NYSEMKT: HEXO) (TSX: HEXO), then known as The Hydropothecary, to form a joint venture to develop cannabis-infused beverages for the Canadian market. This market should open for business in October 2019. HEXO CEO Sebastien St-Louis also recently hinted that the two companies will expand their relationship beyond Canada in the near future.
Molson Coors CEO Mark Hunter stated in his company's Q1 conference call that he expects cannabis will be a part of the company's overall revenue performance beginning in 2020. It's too early to know for sure how big of a contribution cannabis-infused beverages could make to Molson Coors' top line, though.
Regardless of how significant the cannabis opportunity turns out to be for Molson Coors, the company's dividend should be stable. Molson Coors' dividend payout ratio is less than 36%, indicating plenty of financial flexibility when it comes to paying dividends down the road.
3. Scotts Miracle-Gro
When you think of Scotts Miracle-Gro, lawn and garden products probably come to mind. The company is a leader in that market, with a wide range of products sold under its Scotts and Miracle-Gro brands, plus pest- and weed-control products sold under the Ortho, Roundup, and Tomcat brands. Scotts' dividend yields 2.46%.
While consumer lawn and garden products still generate more than 80% of Scotts' total revenue, its Hawthorne Gardening subsidiary is a significant part of the business. Hawthorne's string of acquisitions over the last few years has made it the top supplier of hydroponics products to the cannabis industry.
The expansion of the U.S. cannabis market should be a major growth driver for Scotts in the future, especially as larger states legalize recreational pot. However, the launches of new products, particularly organic products, have fueled solid growth for Scotts' core consumer lawn and garden business.
Scotts' dividend appears to be in great shape. The company's payout ratio is a little over 39%
If you're solely focused on dividend yield, Altria will appeal to you the most. It's hard to beat a yield of more than 6.5%.
However, if you're looking for the cannabis stock with the strongest growth prospects and a solid dividend, my bet would be on Scotts Miracle-Gro. Wall Street analysts estimate that the company will deliver average annual earnings growth of nearly 11% over the next five years. With a booming U.S. cannabis market and innovative new lawn and garden products, I think that Scotts will deliver great total returns over the long run.
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