How $102,750 can give you $10,000 in annual dividend income

By | March 29, 2024

Investors generally want their investments to pay off. Dividend investors also want their investments to pay them. That payment usually comes in the form of dividends: cash payments that companies make to shareholders as a way to share profits. Collect enough dividends and you can help pay your living expenses.

So how do you maximize your dividends and get the most bang for your buck? One way is to buy stocks with the highest returns. But be careful about chasing stocks that pay huge dividends. They can ultimately be return traps: companies that end up losing you your investment because they are fundamentally flawed.

In my search for solid, high-yielding stocks, I’ve found at least one that has so far managed to avoid becoming a returns trap. This dividend stock yields almost 10% today, but investors can buy it and still sleep well at night. If you invested $102,750 in it, this stock would pay out $10,000 in annual income.

Meet British American Tobacco

British-American tobacco (NYSE:BTI) is a global company that sells tobacco products, as well as smokeless products such as vapes, oral pouches and heat-resistant devices. The more popular brands include:

  • Cigarettes: Camel, Nieuwpoort, Lucky Strike

  • Chew tobacco: Grizzly

  • Smokeless: Vuse (electronic cigarettes), Velo (pouches), Glo (heated tobacco)

In total, the British company generated approximately US$34 billion in revenue (GBP 26.9 billion) in 2023. It owns a significant stake in ITC, a company in India that sells tobacco, among a diversified range of other companies. British American’s investment is worth about $15 billion, after management recently sold a small portion to finance share buybacks.

Most importantly, British American Tobacco is an excellent dividend stock. The company pays quarterly dividends rising to $2.92 per share in 2023, a yield of 9.75% at the current share price.

Why you can trust the dividend

As noted above, very high dividend yields are usually a sign that the company is in trouble. The fact that British American Tobacco is a non-US company creates another potential concern for many US investors. So why should you rely on the dividend? Two primary reasons:

First, the company’s financials easily support the payout. Over the past five years, the dividend payout ratio has increased between 50% and 60%. It has not yet come close to a situation where management cannot afford to pay its dividend in cash. Tobacco products are addictive, so the company’s sales are stable.

The inconsistency you see below is because British American Tobacco pays a dividend in its home currency, which must be converted into its American-listed shares.

BTI dividend chart

BTI dividend chart

Imagine that cash flow hypothetically drops by 50%. British American Tobacco still has $15 billion in ITC shares that it could liquidate to get through a rough patch without borrowing money.

The second reason is that dividends are ingrained in the culture of tobacco companies. Shareholders often only hold the shares for the large dividends. You can bet that management will jump through hoops to maintain dividends when things get tough.

How to Buy $10,000 in Annual Income

You shouldn’t put all your money into a few stocks, so don’t worry if you don’t have the resources to buy that many stocks responsibly; you still get a high return on whatever amount you can invest.

Investors will receive $2.92 for each share of British American Tobacco they own. In other words, investors need 3,425 shares to generate $10,000 in annual dividend income. Based on the current share price, that’s a total investment of $102,750.

The cool thing is that it becomes its own little cash cow. The dividends are enough to max out an IRA, and $10,000 can grow into life-changing wealth if you pick the right stocks. You can spend the money on living expenses or whatever you want.

That flexibility is part of what makes dividend investing so attractive in the first place.

Should You Invest $1,000 in British American Tobacco Now?

Before you buy shares in British American Tobacco, consider the following:

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Justin Pope has no position in any of the stocks mentioned. The Motley Fool recommends British American Tobacco Plc and recommends the following options: long January 2026 $40 calls on British American Tobacco and short January 2026 $40 puts on British American Tobacco. The Motley Fool has a disclosure policy.

How $102,750 Can Give You $10,000 in Annual Dividend Income was originally published by The Motley Fool

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