For investors looking to build a second income from shares, the good news is that big risks aren’t necessary to earn a meaningful return. One FTSE 100 stock is quietly offering a forward yield of 5.96% and I think it’s well worth a look.
But how much could a £10,000 investment in this consumer-focused company actually generate?
What the numbers tell us
Here’s the maths. Put £10,000 into this stock at the current forward dividend yield of 5.96%, and that’s roughly £596 a year landing in a portfolio.
Hold that for a decade, assuming the yield is held constant, and the cumulative dividend income alone comes to approximately £5,960. That’s before any share price growth and before reinvesting dividends, which could push the total return considerably higher.
I’ve included a bit of a snapshot for investors below:
- Forward dividend yield: 5.96%
- Market cap: £90.7bn
- Price-to-earnings (P/E) ratio: 11.8
Those are compelling for a single FTSE 100 holding. But which stock is behind it and does the income actually stack up?
A high-yielding defensive giant
The stock in question is British American Tobacco (LSE: BATS).
The company has been one of the most reliable income stocks in the Footsie for years. The shares are essentially flat year-to-date yet up over 30% to 4,181p in 12 months, as I write ahead of the weekend.
Given its low double-digit P/E ratio and sizeable market cap, I think this is a business trading at a meaningful discount to the broader market. It’s a controversial sector, of course, and investors need to weigh that against their own beliefs.
But from a pure income perspective, the numbers speak for themselves. Tobacco has historically been one of the most cycle-resilient industries around with consumption historically holding up even when economies wobble.
A 5.96% dividend yield sounds attractive. But is it built to last?
Does the dividend look sustainable?
That’s the key question for mine. The long-term picture for traditional tobacco volumes isn’t pretty. Cigarette consumption is falling in most developed markets as regulation tightens and habits shift, including the recent UK ban for those born after 2008.
However, the company is investing in next-generation products including vaping and heated tobacco. Profitability in those categories is still developing, and the regulatory outlook remains uncertain.
A sharper-than-expected decline in traditional volumes could put the dividend under pressure down the line.
The risks are real but does the yield still make the case for investors to consider buying?
My verdict
For income-focused investors comfortable with the sector, I think the company makes a genuinely interesting case right now.
Diversification is often the key to generating a long-term income, but there is a lot to like about British American Tobacco.
There aren’t many stocks out there boasting a 5.96% forward yield, a P/E ratio just shy of 12, and a dividend history built on resilient cash flows through the economic cycle.
I’d want to see continued momentum in next-generation products before going in heavily, but at current levels it’s well worth a closer look.
