I originally bought FTSE 100 heavyweight British American Tobacco (LSE: BATS) as a high-yielding dividend stock.
My aim with these shares is to eventually live off the income they generate so I can substantially reduce my working commitments. In this context, the tobacco and nicotine products manufacturer has not let me down.
From 2020 to 2024, it paid respective dividends of 210.4p, 215.6p, 217.8p, 230.89p, and 235.52p. These generated respective annual average yields of 7.8%, 7.9%, 6.7%, 10.1%, and 8.2% in those years.
For 2025, it increased each of its three interim dividends to 60.06p – a rise of around 2% on the previous year.
Analysts forecast that the total dividend this year will be 240.2p, giving a yield of 6.3%. Next year the projection is for 250.3p and the year after for 258.7p.These would generate respective yields of 6.6% and 6.8% on the current share price.
Dividend income payouts
In concrete income terms, another £20,000 invested by me on the 6.8% yield would make £19,402 in dividends after 10 years.
This is also provided that the dividends are reinvested back into the stock over that period – known as dividend compounding. It is a similar idea to leaving interest to accrue in a regular bank savings account.
After 30 years on the same basis, the dividends would rise to £132,929. Including the £20,000 investment, the total value of the holding by then would be £152,929. And this would pay £10,399 in dividend income by that point.
A growth stock too?
That said, high-yielding dividend shares can also be growth stocks too. Over the past year, British American Tobacco’s share price has gone up 45%.
I think some of this has been technical – the result of ongoing share buybacks, which tend to support such gains.
But I believe much of the rest of it has ultimately been driven by realised or expected earnings growth. It is this that acts as the engine for increases in any firm’s share price and dividends over the long term.
In this case, a risk to earnings may result from the intense competition in the sector. However, analysts estimate that British American Tobacco’s earnings will grow by an annual average of 15.3% to end-2027.
To work out what this might mean for the share price, I used the discounted cash flow (DCF) model. This uses cash flow forecasts for the underlying business to identify where any stock should trade.
The DCF in this case shows British American Tobacco shares are 37% undervalued at their current £38.03 price. Therefore, their ‘fair value’ is £60.75.
In my experience, asset prices tend to converge to their fair value over time. This experience comprises several years as an investment bank trader and 35+ years as a private investor.
My investment view
The firm’s long history of generating superb dividend income returns is sufficient for me to buy more shares.
The fact that its share price still appears to have a long way to go to meet its fair value is also a reason. Together means I will buy more of the stock as soon as possible.
