Shares in FTSE 100 heavyweight British American Tobacco (LSE: BATS) are at a one-year high of £35.10.
Given this rise, its yield has fallen – with its 235.52p 2024 annual dividend now paying 6.7%. Nonetheless, this still compares very favourably to the FTSE 100’s current average yield of 3.5%.
So the stock remains a key holding in my portfolio designed to pay me high dividend income into the future. I will use this to further reduce my working commitments as and when I choose.
How much income can it make?
The average amount in a UK savings account is £17,000. This amount of shares in British American Tobacco at the current 6.7% yield would make £1,139 in dividends this year.
On the same basis over 10 years it would rise to £11,390, and over 30 years to £34,170, although this is not guaranteed.
Clearly this is a lot better than could be had in a standard UK savings account.
However, it could be far greater if the common financial practice of ‘dividend compounding’ is used. This simply involves reinvesting the dividends paid by a stock straight back into it.
In this event on the same average 6.7% yield, the dividends after 10 years would be £16,160, not £11,390. And after 30 years on the same basis they would increase to £109,169.
With the original £17,000 added in, the total value of the holding would be £126,169. At that point – given the same average 6.7% yield – the annual dividend income would be £8,453!
A share price profit too?
The other part of the potential profit in a dividend-paying stock – a price gain – might also be in play.
Despite the recent gains, a discounted cash flow analysis (DCF) shows the stock is technically 54% undervalued at its present £34.05 price.
Therefore, the fair value for British American Tobacco shares is £74.02, although prices can go down as well as up.
A DCF measurement identifies where any firm’s share price should be, centred on cash flow forecasts for the business.
A risk for the firm is any delay in its ongoing switch away from the former products and towards the latter ones. This could give its competitors that are pursuing the same strategy the advantage.
That said, its 3 June H1 2025 trading update said it expects to deliver full-year revenue growth of 1%-2%, and 1.5%-2.5% adjusted operating profit growth.
In 2024, its revenue was £25.867bn, and profit was £2.736bn.
Consensus analysts’ forecasts are that the firm’s earnings will increase 16.6% a year to end-2027. And growth here is key to powering any company’s share price and dividends higher over time.
Will I buy more of the shares?
The recent share price gains are immaterial to me, given the enormous value remaining in the stock. Its huge overall potential value is enhanced by analysts’ projections for significant increases in dividends too.
Specifically, these are for 245.7p this year, 252.8p next year, and 263.4p in 2027. Based on the current share price, this would generate respective dividend yields of 7%, 7.2%, and 7.5%.
Given these factors, I will buy more of the shares very soon.
