I’d avoid this 8.2% dividend share and buy this FTSE 100 stock instead!

This FTSE 100 (INDEXFTSE:UKX) stock offers a staggeringly high yield. Paul Summer explains why he’s not tempted.

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Shares in FTSE 100 tobacco giant British American Tobacco (LSE: BATS) are firmly in negative territory today. Should I take this as an opportunity to buy or a signal to seek out alternative blue-chip stocks? I’m inclined to think the latter, even if today’s full-year results were far from awful.

Less puff, more profit

Today, British American Tobacco revealed a 2.8% rise in revenue from its combustible products, thanks to a fall in volume being offset by higher prices. Adjusted profit from operations puffed 4.8% higher and £660m in cost savings was also announced.

By far the most interesting part of today’s report for me however, was the rise in the number of people consuming the firm’s non-combustible products. This climbed 3m to 13.5m over the year. The FTSE 100 titan now believes it can increase this number to 50m by 2030. 

Looking ahead, BAT also said global tobacco industry volume was expected to shrink 3% in 2021. More encouragingly, it still expects constant currency revenue growth of between 3-5%.

All told, I’d say today’s statement was pretty positive. Notwithstanding this, I wouldn’t be queuing up to buy the shares. 

FTSE 100 value trap?

For me, BAT remains a ‘Marmite’ stock. On the one hand, you’ve a global player in an industry that’s practically immune from new entrants. It’s also been a consistent winner from an income perspective. Today’s 2.5% increase to the dividend means the firm will now return a total of 215.6p per share to holders. That gives a staggering trailing yield of 8.2%, reasonably covered by profits. Analysts are forecasting another rise to dividend next year too!

On the other hand, the BAT performance over the last few years leaves a lot to be desired. The shares are now worth roughly half what they were in the middle of 2017 and trade on a P/E of 8. That’s indicative of a value trap, in my opinion.

Other potential negatives include the possibility of new revelations regarding vaping safety (or lack of) and the sizeable amount of debt on its balance sheet. It goes without saying that prospective investors also need to be comfortable about owning a company selling addictive products.

Taking all this into account, I believe there are better options in the FTSE 100. One of these, in my opinion, is BAE Systems (LSE: BA). 

Consistent income 

From an income perspective, the FTSE 100 defence giant is equally attractive. Having now reinstated its dividend, the company is expected to return 23.5p per share for FY20. This gives a yield of 4.9% at the current share price. 

Another boost to BAE’s income credentials is that it has consistently raised its payouts over the years. This is something I particularly look for when screening dividend stocks. A good-but-not-excessive, gently increasing cash return is more desirable to one that barely moves year-on-year.

This isn’t to say BAE will suit all investors. From an ethical point of view, it can arguably be placed in the same group of ‘sin’ stocks as BAT. Moreover, the share price has hardly set the world on fire recently. 

Despite this, I’m confident the ongoing need for nations to protect themselves, particularly in areas such as cybersecurity, makes BAE a solid long-term hold.

 Full-year results are due on 25 February.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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