Hold my cigarette! 2 UK tobacco shares I’d choose with strong dividend yields

When looking for passive income, I’ve found that tobacco shares are a profitable place to look. Here, are my top two UK tobacco shares.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When I’m looking for shares that will generate passive income for me, I want to pick stocks with good dividend yields. I find that tobacco shares have historically been a profitable place to look.

However, it’s important to note that a too-high dividend yield can sometimes be a problem down the line. Here are the two UK tobacco companies I’d choose for making passive income. 

Imperial Brands

Imperial Brands (LSE: IMB), formally known as Tobacco Group plc, is the fourth-largest international cigarette company. Investing in this tobacco share could generate considerable passive income for me with a dividend yield of 8.63% at the time that I’m writing.  

Before the outbreak of the pandemic, Imperial Brands had been able to sustain a positive dividend growth. Between 2014 and 2020, the dividend yield saw a consistent growth of 10%. 

In 2020, we witnessed a significant decline in dividends as the company sought to deal with increasing debt. But in its May 2021 interim results, the company reported a 1% increase in dividend yield again. 

While I don’t like to see a drop in dividends, I’m of the opinion that dividend reduction isn’t necessary a bad thing, especially when the company is devaluing to address net debt. 

In my opinion, based on the company’s positive revenue and profit, I trust that Imperial Brands has a good recovery strategy in place and will be returning sustainable dividends in the future. 

British American Tobacco

British American Tobacco (LSE: BATS) is the largest international tobacco company in terms of net sales. The company has reported a 7% increase in dividend growth since 2010 and as I’m writing it has a 7.8% dividend yield. The dividend last July was at 53.9p. 

On the other hand, the BATS share price has not been anything to shout about over the past year. It dropped by almost 10% in the last 12 months, but has since recovered somewhat.  

However, the company has been reinforcing its sustainable dividend yield with good earnings. BATS reported a 10.5% increase in revenue in its FY2020 report. 

I feel confident that I can make passive income from a share when its good dividend yield is backed up with consistent revenue and profit growth. 

The bearish case for tobacco shares

Both of these tobacco companies will face the issue of regulation over the amount of nicotine in their products. I’m concerned that if these laws are implemented it could affect future sales. This is because of the addictive elements in the substance. BATS have already started venturing out with alternatives such as vapour-based cigarettes and new modern oral products. But I’m unsure if consumers will be satisfied with these products.

Would I buy for passive income?

Tobacco companies could face issues with regulation in the future and will need to find a successful solution to adapt. However, BATS and Imperial Brands both have enticing dividend yields of around 8%. 

This is why I’d buy these tobacco shares wholly as an income play. With a three-year outlook, I believe I could make a decent return from them.

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 considered so you should consider taking independent financial advice.

John Town has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco and Imperial Brands. 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.

More on Investing Articles

Couple relaxing on a beach in front of a sunset
Investing Articles

I’d start buying shares for passive income with this pair

Our writer is looking to earn passive income via investing, and here are two leading stocks he might buy.

Read more »

Tanker coming in to dock in calm waters and a clear sunset
Investing Articles

Here’s the Shell dividend forecast through to 2024

The Shell dividend is still nearly 50% below 2019 levels. Will the oil giant use record profits to rebuild its…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

3 FTSE 100 stocks I think Warren Buffett might love!

Warren Buffett made his fortune thanks to the success of US shares. But here are three FTSE 100 stocks I…

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

Down 75%, has the Deliveroo share price bottomed?

The last 12 months have been torrid for the Deliveroo share price. But does this open an opportunity to grab…

Read more »

Smartly dressed middle-aged black gentleman working at his desk
Investing Articles

Is now FINALLY the time to buy Lloyds shares?

Lloyds shares have leapt in value as market confidence has improved. Should I buy the FTSE 100 bank before it…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

3 high-dividend FTSE 250 stocks to buy right now!

The London Stock Market is packed with top high-dividend stocks to buy. Here are a handful I'm considering buying, despite…

Read more »

Woman using laptop and working from home
Investing Articles

How I’m using my Stocks and Shares ISA to generate lifelong passive income

I’m looking to build a portfolio of assets that will pay me an income in my retirement. Here’s how I’m…

Read more »

Close-up of British bank notes
Investing Articles

Is this the best time in a decade to start buying FTSE 100 dividend shares?

UK dividend yields are rising again. I reckon any time is a good time to start buying dividend shares. But…

Read more »