Collecting dividends from a dividend stock is one of the most satisfying ways to build a passive income. The money arrives whether you’re working, sleeping, or on holiday. And the UK stock market is packed with opportunities to make it happen.
One company that regularly catches the eye of income investors is British American Tobacco (LSE:BATS).
With a dividend per share of 245.04p, investors only need to own 97 shares to unlock a passive income of £237.69 a year. At the current share price of 4,390p, that position would cost approximately £4,258.30 to build – comfortably within reach for many ISA investors.
But is it actually a good idea?
What’s the investment case?
British American Tobacco is one of the world’s largest tobacco companies, owning iconic brands including Dunhill, Lucky Strike, and Newport.
The stock currently yields around 5.7%, making it one of the more generous income opportunities in the FTSE 100. But unlike many high-yield income stocks, the payout is actually backed by substantial and highly predictable cash flows, generated from a deeply loyal customer base.
That’s not a coincidence. Tobacco is one of the most addictive consumer products on the planet, and that dynamic translates directly into pricing power and cash generation that most businesses can only dream of.
But beyond traditional cigarettes, the group has been investing heavily in its New Categories division.
This newer line of products focuses on vapes, heated tobacco products, and nicotine pouches under brands like Vuse and Velo. And the segment is growing rapidly as a central part of management’s strategy to reposition the business away from traditional cigarettes.
The combination of new and legacy product sales continues to generate ample, sturdy cash flows. And that’s subsequently paved the way for continuous dividend hikes each year for over two decades in a row.
Needless to say, that kind of track record speaks volumes about the resilience of the underlying business model, even in the most challenging environments.
What could go wrong?
While British American Tobacco is making good progress with its transition, the company is working against the clock.
Governments worldwide are actively tightening regulations on tobacco and nicotine products at an accelerating pace. From plain packaging laws to outright bans on certain products in key markets, the regulatory headwind is real and unlikely to reverse.
This has already translated into volume declines for traditional cigarettes. And if the group’s New Categories division fails to fully offset this regulatory erosion, long-term cash flows and, in turn, dividends could come under pressure.
The bottom line
For pure income, few dividend stocks on the London Stock Exchange offer what British American Tobacco has right now.
The yield is chunky, the cash flows are formidable, and the New Categories pivot is gaining real momentum.
Obviously, there’s the ethical dimension to consider. Many investors understandably don’t like the idea of having tobacco companies in their portfolios. And that’s a completely legitimate position to take.
But for investors who don’t have such ethical objections and are comfortable with the regulatory risks, this dividend stock could be worth investigating further.
