On the surface of it, income shares are a bit of a no-brainer. Park a little extra cash in a company with this kind of shares and get a percentage of your money back two to four times a year. Anyone looking to build an income stream, even just a few hundred quid or so, might wonder why they should look anywhere else.
We can even work out how much our income stream will cost us ahead of time. It’s not an exact science of course. Dividends do change from year to year, sometimes due to company performance and sometimes due to wider factors that have nothing to do with the company itself. But so long as we’re investing for long enough that the ups and downs get smoothed out, a ballpark estimate isn’t too taxing to work out.
In theory
Let’s start with a £300 monthly income stream. Over the year that will be £3,600 we’re hoping our income shares will pay us in dividends. To achieve that from some of the biggest payers on the FTSE 100 might require an upfront outlay of £45,000 taking an 8% dividend yield. That’s plenty more than you’d get back from a savings account or a buy-to-let and we can get all the money tax-free with shrewd use of a Stocks and Shares ISA.
Before we get ahead of ourselves, let’s just remember that theory is quite different to practice. In this case, very few companies pay out a yield that high and those that do tend not to offer much in the way of share price growth. Perhaps they are in a sector on the decline. Perhaps a large debt pile is weighing heavily on the valuation. Whatever the issue is, it’s important to research your big-paying stock before you get caught short.
One stock like this is British American Tobacco (LSE: BATS). I doubt many people are expecting the maker of Dunhill and Lucky Strike to be a fast-growing company but the problems are perhaps even more severe when taking a look under the bonnet.
Will it grow?
Recent growth has come from raising the prices of the firm’s packs of cigarettes and there isn’t too much room for that left. Taxes on them are sky-high too and no one will complain too loudly if they continue to rise.
Consumption in key markets has been falling for decades and the potential antidote to that problem, non-combustibles such as vapes, make up only a small fraction of sales. The threat of legislation looms for these products too.
The plus side is British American pays a strong dividend that continues to grow. The yield now sits at 8.71%, some way above our hypothetical figure above, and well covered by company earnings which means little threat to upcoming payouts.
Future earnings will be supported too by global consumption of cigarettes, which is expected to rise until 2030, mainly thanks to the cigarette’s “status symbol” effect in medium-income countries.
For anyone looking to invest in income shares to earn an amount of £300 a month or otherwise, I believe this is a stock worth considering.
This post was originally published on Motley Fool
