The main reason I own dividend shares is, you guessed it, dividends!
While some of the companies that regularly pay me dividends also have attractive long-term growth prospects, others are attractive to me mainly because of the opportunity they offer to build my passive income streams.
I currently own shares in a FTSE 100 company that pays over £2 in dividends per share every year. If I bought another thousand of the shares right now, I would therefore stand to earn almost £42 per week on average in dividends. On top of that, I do also see some potential for capital growth!
Lucrative dividend shares
The company in question is British American Tobacco (LSE: BATS).
The London-based global giant manufactures and sells tobacco products under brands such as Lucky Strike. That can be a very lucrative business model. Cigarettes are cheap to make but premium brands give BATS pricing power. Tobacco sales are resilient even in a recession, although a clear risk is the long-term structural decline of cigarette smoking.
That helps fund a beefy dividend that currently stands at just under £2.18 per year, paid in four equal quarterly instalments. Tobacco’s strong cash flows can fund large dividends and BATS has grown its payout annually for over 20 years. Dividends are never guaranteed, though, and a debt-heavy balance sheet is a risk to the payout alongside declining cigarette sales.
The tobacco maker is trying to address the declining cigarette market by extending its other businesses and using its pricing power to push up prices. Last year, company revenues only slid 0.3%.
Will the BATS share price rise?
Not only do I like the income potential of these dividend shares, I am also hopeful that buying them today could potentially offer me some capital gains.
In the past year, the BATS share price has jumped by a third. That happened at a time when many share prices have been falling.
The share price jump partly reflects investor enthusiasm for defensive shares at a time of economic uncertainty. Combined with strong business performance and an attractive dividend yield of 6.4%, I hope that could help boost the shares further in coming years.
Should I invest?
The BAT share price is currently around £33.50.
So buying 1,000 more shares for my portfolio would cost roughly £33,500 – a lot of money. I would also need to make sure my portfolio remained diversified and was not too heavily focussed on one stock. After all, I already own BATS shares.
If I could keep enough diversification and had spare money to do so right now, I would buy another thousands of these dividend shares. I would then get set for more passive income!
