I’d spend less than £12,000 on 434 of these UK shares for a £1,000 yearly passive income

A four-figure passive income each year by investing a one-off sum below £12,000? Christopher Ruane explains how he could target such a goal.

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Buying high-yield blue-chip shares can be a straightforward way to try and boost your passive income streams. That is what I try to achieve by buying UK shares in strong business that I think have attractive dividend prospects.

Doing so does take some money. With so many different shares available, one also needs to make some choices!

Different people each have their own investing objectives, so what works for one might not fit another. But if I wanted to aim to boost my passive income by £1,000 per year right now, I would invest around £11,800 in buying 434 shares of a longstanding FTSE 100 company.

Huge cashflows and iconic brands

That company is not exactly a household name, in fairness. But some of the brands it owns are, including Lucky Strike and Dunhill.

British American Tobacco (LSE: BATS) is the owner of these and many other brands. As it has a portfolio of premium brands, it has pricing power. That can help it make sizeable profits – after all, cigarettes are cheap to manufacture but can sell at a high price.

Such pricing power is also helping the firm offset some of the impact of falling cigarette volumes, as smokers around the world increasingly stub out a potentially fatal habit.

The economics of the industry mean that it can generate big profits. As one of the world’s biggest producers, Brtitish American enjoys economies of scale.

That translates into mammoth cash flows. Last year, the business generated £3.1bn of free cash flows even after paying dividends.

High-yield investment

Those dividends totalled £4.9bn.

That means that this company, with its £60bn market capitalisation, generated £8bn of free cash flows last year alone before taking the dividend cost into account.

Those dividends currently stand at 57.7p per share each quarter. So my 434 shares ought to earn me just over £1,000 in annual passive income.

British American has a dividend track record unmatched by most UK shares, having lifted its payout annually for a quarter of a century. Last year’s raise was 6% and the company plans to keep raising its payout, although that is never guaranteed.

Some potential risks

Smoking can be a very harmful activity. Could investing in tobacco shares be financially hazardous despite the high yields?

Although the company sold over 600bn cigarettes last year, that market is clearly in long-term decline. The decline could yet be drawn out over decades, with cash flows remaining substantial for a long time to come. But it might suddenly accelerate.

British American Tobacco is trying to prepare for such a time by building its non-cigarette business quickly, for example investing in its Vuse vaping brand. So far, though, that division has been loss-making. It remains to be seen whether the economics of such products will be anything like as attractive as cigarettes in the long run.

Adjusted net debt of £37bn at the half-year point is also higher than I like. Repaying it could eat into profits that might otherwise fund dividends.

Still, British American Tobacco is among the highest-yielding UK shares I own and overall I remain upbeat about its business prospects. I would be happy to add more to my portfolio if I had spare cash to invest.

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.

C Ruane has positions in British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. 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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