Dividend shares are quite prevalent on the London Stock Exchange. The UK’s home to a vast array of mature businesses, which makes it the perfect hunting ground for income investors. And some are currently offering impressive payouts that can help establish a significant second income.
One of the more notorious dividend shares within the FTSE 100 is British American Tobacco (LSE:BATS). The rise of Environmental, Social and Governance (ESG) investing has made tobacco companies relatively unpopular in recent years. But this unpopularity’s given way to some jaw-dropping yields that continue to be maintained through the sale of highly cash-generative products.
Earning £45 a week
Right now, British American Tobacco shares are offering an impressive 235.52p dividend per share. And compared to the current stock price, that’s an annual yield of roughly 9.5%. For the sake of comparison, the FTSE 100 as a whole is currently only offering 3.6%.
With these figures in mind, owning 1,000 shares of this enterprise would generate around £2,355 each year, which is the equivalent of a little over £45 a week. Of course, that’s what could be earned right now. As a member of the Dividend Aristocrats, management has a knack for raising its dividend over time.
Therefore, having 1,000 shares in my portfolio could end up generating considerably more in the long run, especially if dividends are being reinvested along the way. Despite the known health-harming effects of cigarettes, combustible tobacco remains a highly popular habit worldwide. And in my opinion, the demand isn’t likely to disappear anytime soon.
So does that make these dividend shares a terrific addition to my income portfolio?
Uncertainty building
While British American Tobacco isn’t lacking cash flow, the business is riddled with uncertainty. Demand for cigarettes may not disappear, but that doesn’t mean regulators aren’t trying their best to cut down the number of smokers.
Increasingly strict regulation’s making it quite difficult to expand with traditional cigarettes. Management isn’t blind to this threat. And like many of its peers, the firm has begun diversifying into non-combustible tobacco products, such as vaping devices and cartridges.
These alternative products are starting to deliver some encouraging results. But there’s still a long way to go before they become the dominant source of income. And even when they do, there’s no guarantee they’ll carry the same profit margins. Not to mention that some regulators are also beginning to target these ‘healthier’ products as new studies emerge.
For example, Australia’s just implemented new laws that severely restrict the sale of vaping devices. Meanwhile, some states in the US, like California, have already introduced bans for certain vaping products, namely flavoured e-cigarettes.
Right now, there’s a giant question mark over the fate of these newer products. And if regulators start to enact similar restrictions to that of cigarettes, the business is likely to struggle. That’s why, despite the lucrative income prospects, it’s not a dividend stock I’m eager to own right now.
This post was originally published on Motley Fool
