British American Tobacco (LSE: BATS) shares have a forecast dividend yield of 6.6%. So to earn passive income of £100 per month, I’d need to invest a shade short of £20,000. At the current share price, that’s approximately 600 shares.
I don’t have 20 grand to hand right now. But that’s fine, because I’m not looking for monthly income just yet. I intend to keep investing for the next 10 years and more before I expect I’ll want the cash.
So, instead of taking £100 per month out in passive income, I could invest £100 per month in shares. At today’s figures, that would get me to the required sum in a little less than 12 years. After that, I could start taking the income for as long as I held the stock.
Changes
I don’t expect the share price or the dividend yield to remain unchanged over the coming years. So this is just an illustration of the kind of long-term returns a dividend stock might bring.
If I want to secure passive income through dividend shares, I need to look at a few more things than just the current yield.
That includes dividend cover. A good dividend cover would mean the company is generating enough profits to cover the cash it pays to shareholders. Ideally, there’ll be a decent excess, which can help the payments to continue during leaner times.
Well covered
In recent years, the British American Tobacco dividend has been covered a bit over 1.5 times by earnings. For a company with good visibility of earnings, I think that’s plenty. The firm has also been returning spare cash by buying back its own shares in 2022. And that boosts my confidence in its ability to generate lots of the folding stuff.
In fact, at first-half results time this year, the board said: “We expect to generate £40 billion of free cash flow before dividends over the next five years“. I’d like some of that.
I also like a dividend to be progressive over the long term, and I see that here. It’s been growing slowly but steadily in recent years. And the company stressed its “commitment to dividend growth in sterling terms“.
Tobacco risk
I’m painting a positive picture here, but I’m aware that the horizon is not without clouds. In this case, they’re clouds of smoke, from all that tobacco. The weed is still immensely popular among huge swathes of the population, mainly in developing countries. And new generation tobacco products are catching on.
But there’s clearly some long-term risk here. I might have overestimated the staying power of the tobacco industry. And if I have, this could turn out to be a losing investment.
But British American Tobacco is on my list of dividend candidates for 2023. I’d only buy it as part of a diversified portfolio, to reduce my overall risk. And I really do think that building a selection of dividend stocks like these is my best chance of securing passive income for retirement.
