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This 7% yield may be the safest on the FTSE 100! I’d buy it in an ISA to retire early

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Now is a tough time to be an income investor, as stock markets crash and FTSE 100 companies scrap their dividends. This makes life harder for investors who want to buy reliable income stocks for their Stocks and Shares ISA, to fund an early retirement.

I have been casting around for dividends that should endure, even if the economic lockdown and stock market crash continue. I was therefore fascinated to see a report by Deutsche Bank, which named tobacco dividends as “amongst the safest in the market”.

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That will come as good news for many ISA investors, as others delay their dividends or drop them altogether.

Safe FTSE 100 dividends

Even FTSE 100 companies that can afford to continue paying dividends may face pressure to freeze payments. This is even more likely if they furlough staff or receive crisis support from the public purse.

British American Tobacco (LSE:BATS) customers are likely to carry on smoking during this crisis. Some may possibly smoke more than before as life gets stressful. Some who have lost their income may quit smoking if they can no longer justify the expense.

Tobacco stocks are traditionally seen as safe havens, but their share prices can still take a hit. In the 2008 financial crisis, the BATS share price roughly halved, before recovering strongly. Investors who bought at a discounted price then will have been amply rewarded. Bargain seekers have another opportunity today.

British American Tobacco share price tempts

So far British American Tobacco has fallen around 15%, a relatively modest drop compared to many on the FTSE 100. It trades at a lowly 9.1 times earnings, although you shouldn’t put too much faith in stock valuations right now, given the uncertainty.

You can put more faith in the company’s dividend yield, which stands at a generous 7.1%, with cover of 1.5. That would be attractive at any time, even more so in the middle of this unprecedented stock market crash. It could still help you retire early.

Deutsche Bank isn’t the only broker to highlight the relatively safety of tobacco company dividends. Last week, Citigroup highlighted British American Tobacco as being able to maintain payouts.

Stocks and Shares ISA income hero

British American Tobacco hit the news earlier this week, as biotech subsidiary Kentucky BioProcessing announced it was developing a potential coronavirus vaccine. The news had surprisingly little impact on the British American Tobacco share price, though, and remains a sideshow.

If you are happy investing in this sector, the British American Tobacco share price should prove relatively resilient. With luck, so should its yield. Nothing is guaranteed, but this could be a great way of generating a reliable income inside a Stocks and Shares ISA.

The Covid-10 stock market crash may have knocked your plans to retire early. British American Tobacco could keep you on track.

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Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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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