Selecting the right dividend shares is key to generating passive income streams over the long term. That said, it can often be difficult to know what companies to invest in.
Dividends are never guaranteed. While double-digit yields can often be enticing, it’s important investors do their homework.
The average yield on the Footsie comes in at just shy of 4%. While I tend to target companies that pay out a larger return than that, I’m more concerned about making sure that the companies I invest in can provide sustainable dividend payments moving forward.
That’s why I like the look of these two stocks. I reckon there’s the argument to be made they’re up there with the best dividend shares on the index. If I had the cash today, I’d snap them up.
British American Tobacco
One stock I own is British American Tobacco (LSE: BATS). It hasn’t seen the greatest performance in the last five years. It has lost 10.9% of its value in that time. That said, it’s showing signs of momentum this year, rising 5%.
It also yields a meaty 9.5%. That’s way above the Footsie average. What’s even more impressive is that the business has paid a dividend for over two decades, cementing itself as a Dividend Aristocrat.
That’s incredibly important to me. We saw just how many businesses cut their dividends during the pandemic and events such as the Global Financial Crash. A track record of returning to shareholders like the one British American has is worth its weight in gold.
Now, I’m aware of the threats. Its core cigarettes business is declining in multiple markets. There are also regulatory risks.
However, the business is seeing solid progress with its diversification into non-combustible goods. And its shares look like cracking value for money right now. They trade on a price-to-earnings (P/E) ratio of 6.5. Its forward P/E is 7.7.
Diageo
While the tobacco giant has started to gain some ground this year, Diageo (LSE: DGE), on the other hand, has been heading in the opposite direction. Year to date, the alcoholic beverage behemoth is down 11.7%.
But just like British American Tobacco, I’m drawn in by its magnificent track record. Its current yield of 3.3% is just below the Footsie average. Nevertheless, Diageo has increased its payout for a whopping 37 years in a row and that’s a major lure. Considering the challenges the business has faced during that time, it’s impressive.
Just as British American has been feeling the squeeze in its core markets, so has Diageo. Sales have wavered in the Latin America and Caribbean region while it has also experienced a slowdown in sales in the US. Its premium brands come at a price. Clearly, consumers have been reverting to cheaper alternatives.
But this dip in price is an opportunity for shrewd investors like myself to consider snapping up the Dividend Aristocrat. In the decades to come, I think its dominant market position as well as trends such as rising wealth in developing nations will see it prosper.
