FTSE 100 shares are a brilliant way to generate a second income and now looks like a terrific time to buy them. The index is packed full of blue-chips offering yields of 6%, 7%, 8% a year or more, and I’m filling my boots.
Yet there’s one brilliant dividend income stock I’m not buying. That’s nothing to do with the quality or sustainability of its income. It’s purely down to the fact that the stock is British American Tobacco (LSE: BATS) and I’m no great fan of smoking.
Which is annoying, because on almost every other measure I’d buy this stock today. It’s currently forecast to yield a blockbuster 9.24% in 2023. In 2024, analysts reckon that will climb to 9.63%. Only a handful of FTSE 100 stocks come close.
I’m turning down high income
While ultra-high yields can be too expensive to maintain, that doesn’t seem to be a problem with British American Tobacco. Its revenues are fairly solid, because giving up smoking is hard. Also, the Western anti-smoking trend has yet to be replicated elsewhere, giving big tobacco a huge global market to aim at.
British American Tobacco has continued to grow by increasing its market share via big brands such as Benson & Hedges, Pall Mall, Craven A, Lucky Strike, Dunhill and Peter Stuyvesant. Plus it’s opening up new territory in vaping and e-cigarettes.
| Revenues | Pre-tax profits | Earnings per share | Dividend per share | Dividend yield | |
| 2018 | £24.49bn | £8.35bn | 297.6p | 203.0p | 8.1% |
| 2019 | £25.88bn | £7.91bn | 324.8p | 210.4p | 6.5% |
| 2020 | £25.78bn | £8.67bn | 333.0p | 210.4p | 7.8% |
| 2021 | £25.68bn | £9.16bn | 330.4p | 215.6p | 7.9% |
| 2022 | £27.66bn | £9.32bn | 373.2p | 217.8p | 6.6% |
My table shows what a steady business this is. Revenues and profits dipped during the pandemic, but not by much, and have recovered nicely. Earnings per share climbed steadily throughout. The dividend was held in 2020, but that’s on the mend too.
Steady revenues
In fact the only thing that isn’t climbing is the British American Tobacco share price. At today’s 2,592p, it’s back where it was in April 2011, more than a dozen years ago. That’s largely due to the 25% drop in the last 12 months, which would give me another reason to buy British American Tobacco if I was so minded. I love buying cheap, resilient stocks after a bad run. And it’s definitely cheap, trading at 7.26 times earnings.
British American Tobacco is forecast to pay a dividend of 251.9p per share in 2023. If I invested £10,000 today, I’d get 385 shares. That would give me income of £970 over the next year. In 2024, when the dividend per share is forecast to be 269.6p, I could look forward to another £1,038.
Dividends are never guaranteed, and British American Tobacco shares may never grow much, but that is still a brilliant rate of income. I’m just torturing myself here, because I’m still not going to buy it.
Thankfully, there are a fair number of FTSE 100 stocks offering super-high yields that I’m happy to buy (I’m looking at you, Legal & General Group). As well as a handsome second income, they may also give me some share price growth.
