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A dirt-cheap 8.5%-yielding FTSE 100 dividend stock that I’d buy for 2021

Rupert Hargreaves
·3-min read
FTSE 100 (London Stock Exchange Share Index) on Gold Coin Stacks Isolated on White
FTSE 100 (London Stock Exchange Share Index) on Gold Coin Stacks Isolated on White

Following the Bank of England’s decision to slash interest rates earlier this year, rates on savings accounts have plunged. However, high-quality blue-chip dividend stocks could provide an alternative. With that in mind, today I’m going to take a look at a dirt-cheap FTSE 100 dividend stock that one may benefit from buying in 2021.

FTSE 100 dividend stock

When it comes to dividends, tobacco giant British American Tobacco (LSE: BATS) stands in a league of its own. Ethical considerations aside, this business is a dividend champion.

The group has consistently paid and maintained a high level of payouts to investors. It doesn’t look as if this is going to change any time soon.

In many ways, the organisation is designed to produce high cash returns for investors. The group’s large profit margins and competitive advantages mean it is highly cash generative. And unlike many other companies, which have to reinvest substantial sums back into the business to remain competitive, this FTSE 100 dividend stock has no need to do that.

For example, last year, the group only reinvested £800m compared to the overall cash generated from operations of £9bn. The rest was available for distribution to investors.

Dividend champion

With so much cash available for distribution, it should come as no surprise that British American is a dividend champion. At the time of writing, the stock supports a dividend yield of 8.5%. That is more than double the FTSE 100 average.

It’s also extremely attractive compared to the average interest rate on savings accounts. According to my research, the best interest rate available on flexible savings accounts right now is less than 1% on average.

As well as the high level of dividend income the FTSE 100 dividend stock has the potential to provide, it also looks cheap. According to current analysts forecasts, shares in the blue-chip income stock are currently changing hands at a forward price-to-earnings (P/E) ratio of 7.4. The market average P/E is 13.6. That’s a big gap.

As such, it appears to me that the shares could offer a wide margin of safety at current levels. This implies that one may see high total returns from the investment over the long term through a combination of income and capital growth.

The bottom line

Many UK shares are currently facing an uncertain outlook. The combination of Brexit and the coronavirus pandemic have severely impacted investor sentiment towards these businesses. Nevertheless, as these headwinds recede over the next 12 months, I reckon sentiment towards UK shares like British American will improve.

Therefore, I think the stock could be worth buying for 2021. If investor sentiment begins to improve, the stock price could rise, which would mean investors would have to pay more to own part of this FTSE 100 dividend stock. One may benefit in the long run from buying ahead of this situation and paying a lower price.

The post A dirt-cheap 8.5%-yielding FTSE 100 dividend stock that I’d buy for 2021 appeared first on The Motley Fool UK.

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Rupert Hargreaves owns shares in British American Tobacco. The Motley Fool UK has no position in any of the shares mentioned. 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 2020