With just a couple of exceptions, British American Tobacco (LSE: BATS) has raised its annual dividend almost every year since the start of this century. The most recent minor dip was in 2018, but the trend soon picked up again.
Today, we’re looking at a forecast 6% dividend yield, which I reckon could be one of the best on the FTSE 100 for generating passive income.
On top of the nice fat dividend expected this year, forecasts show it continuing to rise. They see earnings per share rising too, keeping cover above 1.4 times. As a dividend investor, that looks good to me.
What might a dividend like this generate in a Stocks and Shares ISA over the long term? Well, £500 a month invested at that return, with dividends reinvested, could compound to over £220,000 in 20 years. And that could then pay £12,500 a year in passive income.
Dividends can never be guaranteed, so I’d never put too much of my investment cash into a single stock like this. That’s why diversification‘s essential.
Long term, the clear risk is that the world will wean itself off the smoking habit. And even if significant numbers of smokers move to modern vape-type products, the overall demand could still fall off. The tug-of-war between the bulls and bears is about when, if ever, that happens. So I can see the profits and dividends carrying on for many years yet.
Out of favour
Diageo‘s (LSE: DGE) very much unloved by today’s investors. The share price is down 29% in the past five years, tumbling from a high in late 2021.
But for most of the 21st century, barring a couple of short-term wobbles, it’s kept its dividend growing. It’s never been one of the FTSE 100’s top yielders. But the share price fall has bumped the forecast dividend to 4.3% now. And that’s really pretty decent.
Why’s the Diageo share price been falling? I’ve seem a number of suggestions, as investors raise fears of a long-term decline in the desirability of alcohol. But I think the key reason — short term, at least — is simpler. I reckon the shares had been significantly overvalued.
Had the Diageo share price held around that 2021 peak, we’d now be looking at a forecast price-to-earnings (P/E) ratio over 30. And the forward dividend yield would be under 2%. That might be a fair valuation for a high-tech growth stock. But for a booze seller like Diageo?
As it is, the P/E for the next year-end, at 14.5, is close to the long-term index average. That seems fair for a company paying near-average dividends.
The big long-term risk indeed has to be alcohol going out of fashion. And I hear plenty of anecdotal stories of individuals drinking less — my own consumption is close to zero these days. But does that represent the worldwide market? Maybe not.
For both these stocks, it comes down to how investors see the future of alcohol and tobacco. I think those who aren’t so pessimistic about their ending could do well to consider buying.
