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I’d buy this FTSE 100 stock for its high dividend yield

Manika Premsingh

The tobacco industry has fallen out of investor favour, and for good reason, given the health hazards associated with consuming tobacco products. But that doesn’t need to be the end of FTSE 100 giants like British American Tobacco (LSE: BATS) and Imperial Brands. There are big disruptions occurring across multiple industries as consumers demand things like cleaner and healthier alternatives to existing foods and drinks, as well as energy supplies, and even tobacco. Plus, fast-paced growth in technology is driving how companies do business across different sectors. Plenty of companies have already pivoted successfully (banks being a big example), and tobacco companies may do the same.

Share price increases to consider

At this time of transition, the share price for BATS hasn’t exactly been the best performer in the FTSE 100 universe, but I would be remiss if I didn’t point out that the share price was in fact up by 16.4% at the last close compared to the same time last year. We at the Motley Fool like to consider the long-term investor, but if you are one who is savvy about timing the markets and interested in capital gains, this is something to consider.

High dividend yield

But even a sluggish share price may be a positive for investors who aren’t in a hurry to sell their shares, but are looking to earn a dividend income from it. Here’s why. My estimates show that the BATS dividend yield is at 6.9% for 2019, the dividend yield being measured as the dividend paid out by the company per share as a proportion of the current stock price. Essentially, it helps me as the investor to assess the income I stand to earn if I invest in the stock at today’s share price.

This 6.9% is a good place to be, compared to being an investor in many other FTSE 100 companies. As my Fool colleague Rupert Hargreaves pointed out recently, the FTSE 100 index on average has a dividend yield of 4.5%. This means, that if I invest today in BATS, then I get a 2.4 percentage points higher income.

Considering the risks

There are two reasons that BATS has a high dividend yield. One, the actual dividend paid has increased by 4% in 2019 compared to last year. And two, its share price hasn’t been doing quite as well as some other shares. Sometimes a high dividend yield indicates that the company isn’t doing well, and its share price is so low that the dividend yield automatically increases. It can also suggest that the company is paying higher dividends than it can afford. I’d be afraid to buy BATS if the high dividend yield indicated that it’s a poorly performing company, but that’s not the case. Its revenues have been growing steadily and I think it’s a defensive share at a time when we could be headed for recession, making it a stock to consider buying for me.

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Manika Premsingh has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019