The Motley Fool

A dirt-cheap 8.5%-yielding FTSE 100 dividend stock that I’d buy for 2021

Image source: Getty Images

Following the Bank of England’s decision to slash interest rates earlier this year, rates on savings accounts have plunged. However, high-quality blue-chip dividend stocks could provide an alternative. With that in mind, today I’m going to take a look at a dirt-cheap FTSE 100 dividend stock that one may benefit from buying in 2021.

FTSE 100 dividend stock

When it comes to dividends, tobacco giant British American Tobacco (LSE: BATS) stands in a league of its own. Ethical considerations aside, this business is a dividend champion. 

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

The group has consistently paid and maintained a high level of payouts to investors. It doesn’t look as if this is going to change any time soon. 

In many ways, the organisation is designed to produce high cash returns for investors. The group’s large profit margins and competitive advantages mean it is highly cash generative. And unlike many other companies, which have to reinvest substantial sums back into the business to remain competitive, this FTSE 100 dividend stock has no need to do that. 

For example, last year, the group only reinvested £800m compared to the overall cash generated from operations of £9bn. The rest was available for distribution to investors. 

Dividend champion

With so much cash available for distribution, it should come as no surprise that British American is a dividend champion. At the time of writing, the stock supports a dividend yield of 8.5%. That is more than double the FTSE 100 average.

It’s also extremely attractive compared to the average interest rate on savings accounts. According to my research, the best interest rate available on flexible savings accounts right now is less than 1% on average.

As well as the high level of dividend income the FTSE 100 dividend stock has the potential to provide, it also looks cheap. According to current analysts forecasts, shares in the blue-chip income stock are currently changing hands at a forward price-to-earnings (P/E) ratio of 7.4. The market average P/E is 13.6. That’s a big gap. 

As such, it appears to me that the shares could offer a wide margin of safety at current levels. This implies that one may see high total returns from the investment over the long term through a combination of income and capital growth. 

The bottom line

Many UK shares are currently facing an uncertain outlook. The combination of Brexit and the coronavirus pandemic have severely impacted investor sentiment towards these businesses. Nevertheless, as these headwinds recede over the next 12 months, I reckon sentiment towards UK shares like British American will improve. 

Therefore, I think the stock could be worth buying for 2021. If investor sentiment begins to improve, the stock price could rise, which would mean investors would have to pay more to own part of this FTSE 100 dividend stock. One may benefit in the long run from buying ahead of this situation and paying a lower price. 

There’s a ‘double agent’ hiding in the FTSE… we recommend you buy it!

Don’t miss our special stock presentation.

It contains details of a UK-listed company our Motley Fool UK analysts are extremely enthusiastic about.

They think it’s offering an incredible opportunity to grow your wealth over the long term – at its current price – regardless of what happens in the wider market.

That’s why they’re referring to it as the FTSE’s ‘double agent’.

Because they believe it’s working both with the market… And against it.

To find out why we think you should add it to your portfolio today…

Click here to get access to our presentation, and learn how to get the name of this 'double agent'!

Rupert Hargreaves owns shares in British American Tobacco. 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.

Our 6 'Best Buys Now' Shares

The renowned analyst team at The Motley Fool UK have named 6 shares that they believe UK investors should consider buying NOW.

So if you’re looking for more stock ideas to try and best position your portfolio today, then it might be a good day for you. Because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.

I would like to receive emails from you about product information and offers from The Fool and its business partners. Each of these emails will provide a link to unsubscribe from future emails. More information about how The Fool collects, stores, and handles personal data is available in its Privacy Statement.