When it comes to generating passive income from the stock market, there are a number of FTSE 100 stocks that jump out as potentially brilliant candidates for my portfolio.
Today, I’m running the rule over one in particular.
Income superstock
British American Tobacco’s (LSE: BATS) been a favourite among income investors for donkey’s years. And it’s not hard to see why.
Should you invest £1,000 in British American Tobacco right now?
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This is a company that’s built a great record of consistently raising the amount of cash it hands back every quarter. And consistency isn’t something the market’s known for.
But it’s not just the hikes that appeal to me. It’s the size of the dividend yield itself.
Sky-high dividends
Based on analyst projections, the top-tier giant will dish out a total of 238p per share to investors in FY24. Using the stock price as I type, that converts to a monster yield of 8.6%, or £86, if I’d had £1,000 invested.
For perspective, the index itself yields ‘just’ 3.5%. On top of this, only three other businesses — all from the financial sector — offer more.
Oh, and I can take a stake for less than eight times forecast earnings. That’s dirt cheap, at least compared to the UK average.
Surely all this makes it a ‘no-brainer’ buy for this Fool? Unfortunately, it’s not quite that simple.
Falling consumption
As investors, we’re regularly reminded to not assume that the future will resemble the past. Accordingly, I can’t assume that a Dividend Aristocrat like British American Tobacco will keep on keeping on.
For one, we know that global tobacco consumption’s falling. In a 2024 report, The World Health Organisation estimated that about 22% of adults used tobacco in 2020. That’s down from 33% in 2000. By 2030, it’s expected to be 18%.
As far as the UK’s concerned, the new government’s mulling over additional restrictions on outdoor smoking and prohibiting the sale of tobacco to people born on or after January 2009.
It’s hardly a bullish backdrop.
Safe for now?
To be fair, this FTSE 100 beast has been doing what it can to protect earnings. Next-generation products are proving very popular. Vuse, for example, is the number-one global vaping brand.
There are also many parts of the world where public health campaigns on smoking aren’t a priority, at least for now. Usage rates in countries like Egypt and Jordan are actually rising!
This leads me to think that dividend payments — while never guaranteed — should continue for a good while yet.
My verdict
From an ethical point of view, I understand why some people won’t go near British American Tobacco. The same argument can be levied at other ‘sin stocks’, like defence contractors and betting firms.
Looking at it purely from the perspective of investing for passive income however, I like what I see and might be tempted if I had the funds to put to work.
But a no-brainer buy? I’d hesitate to say that about any company. The only no-brainer move for me is maintaining a diversified portfolio.
Owning a bunch of dividend-paying stocks from different sectors should help me mitigate any damage if one or two of them are forced to cut or cancel their distributions.
