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Forget tonight’s £25m Lotto jackpot! I’d buy these FTSE 100 stocks

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Tonight’s £25m UK Lotto is a “Must Be Won” draw. If no one matches all six main numbers, the jackpot will be shared by all cash winners, “so they’ll win an even bigger prize. For example, that could mean winning £100 for matching three main numbers instead of £30!”

I’m not tempted. The fact is millions of people could spend literally millions of lifetimes playing the lottery and still never scoop a jackpot or life-changing sum. Instead of buying lottery tickets, I’d aim to get rich by buying shares in FTSE 100 companies British American Tobacco (LSE: BATS), Reckitt Benckiser (LSE: RB), and Tesco (LSE: TSCO). Here’s why.

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£6b trumps £25m!

By buying shares in a company you become a part-owner of the business and its assets. BATS’s assets are currently £148b, RB’s are £39b and TSCO’s are £57b. Last year, these companies generated cash of £10.3b, £2.5b and £2b from operating their assets. They reinvested some of the cash in the business, with a view to generating higher cash flows in future, and distributed some of the cash to shareholders as dividends (£4.3b, £1.2b and £0.4b).

I say, forget a share of tonight’s £25m lottery! I’d rather have a share of the three companies’ £6b dividends. And the dividends I’d expect them to pay in future years for as long as I owned the shares.

The joy of dividends

At the time I’m writing, BATS’s share price is 2,985p, and City analysts are forecasting the company will pay a dividend of 210p on each share this year (a 3.4% increase from last year). This would give a dividend yield of 7%. Put another way, BATS would hand you a £7 cash dividend for every £100 of shares you own.

RB’s share price is 5,950p, the forecast dividend is 171p (0.2% up on last year), and the yield is 2.9%. For TSCO, the share price is 233p, the forecast dividend is 7.95p (37.8% up on last year), and the yield is 3.4%. The average yield of the three companies is 4.4%.

It costs £104 a year to play the Saturday lottery each week. If you used this to buy shares in BATS, RB, and TSCO each year, and also used your dividends to buy additional shares, I calculate (assuming a 4.4% yield) that after 16 years you’d be receiving enough in annual dividends to play the Saturday lottery each week for free!

Or, of course, you could go on reinvesting your dividends to own a bigger and bigger stake in the three companies’ assets and cash flows.

That 7% yield

Finally, I think it’s worth commenting on BATS’s relatively high dividend yield of 7%. The company is one of the giants of the industry, and has been a lucrative long-term investment for those with no ethical objection to owning shares in this sector.

Lately though, some investors have become concerned about increasing regulation, as well as BATS’s current elevated level of debt, following a large acquisition. However, due to the company’s history of resilience and adaptability, I have a glass-half-full view, and see the 7% yield as good compensation.

If you’re averse to investing in tobacco stocks or are concerned about the outlook for the industry, the good news is there are plenty of other FTSE 100 companies around that I think offer attractive investment potential. And you’ll find many of them featured in the pages of the Motley Fool.

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G A Chester has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesco. 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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