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Why I’ve been buying this high-yield share in 2020

Christopher Ruane
·3-min read
Compass pointing towards 'best price'
Compass pointing towards 'best price'

Who would say no to more income? Whether saving for retirement, or just keen to splash a little extra cash in the next few months, increasing one’s income is always attractive. A high-yield share can help do just that.

It’s rare to find a blue-chip share paying a reliably high yield. Today I’ll examine a leading UK company that does exactly that.

Reliable product demand drives sales

The company I like for its high yield of nearly 9% is British American Tobacco (LSE: BATS), a leading global tobacco maker with brands like Lucky Strike and Dunhill. I’ve held its shares for some time already. The reason its dividend payouts are reliable is because, even though a lot of smokers quit each year, the worldwide cigarette market continues to be huge.

That reliable demand has seen the company continue to deliver even during hard times. Even though volume fell 6% in the first half of 2020, revenues increased. Adjusted pre-tax profits rose over 3%. Despite its strong performance, the company’s shares have been unloved this year, falling over a fifth since 2020 began. That has improved its already high yield.

BAT has a portfolio of brands and wide geographic spread. So it is set to continue growing revenues even as cigarette volumes fall in many western markets. Its premium brands also give it pricing power, which helps compensate for falling volumes. The FTSE 100 giant is also building future revenue streams in newer product areas like heated tobacco, where its Glo brand is growing in double digits.

A track record of dividend growth

BAT’s high yield is only part of why I like it as a dividend share. British American Tobacco is one of only a handful of FTSE 100 companies that has increased its annual payout every year for two decades. That means investors can tuck the shares away while the dividends roll in, larger every year.

Unlike some companies that dangle a high-yield with poor business results, BAT’s dividend looks secure. Every year in the past five years, for each pound the company has paid in dividends, it has reported earnings of £1.35. So not only is the dividend adequately covered, there is also substantial room to keep growing dividends in coming years even if earnings stay flat.

As the stock market price has been hit by this year’s market mayhem, the high yield has become even more attractive. Each British American Tobacco share is paying out £2.10 in dividends this year, so BAT currently offers investors a yield of over 8% each year. That will only grow if the company maintains its decades-long policy of annual dividend increases.

This is a bargain price for a quality yield

I have been loading up on BAT this year. The well-covered dividend and high payout level makes it an attractive high-yield share. The company continues to grow revenue and earnings, which bodes well for its future dividend payouts.

With shares near multi-year lows, the already attractive dividend looks juicier than ever. BAT offers an annual return over 8% compared to the average FTSE 100 yield of less than 5%.

I’ve been adding to my BAT holding in 2020 precisely because I see it as such a high-yield bargain.

The post Why I’ve been buying this high-yield share in 2020 appeared first on The Motley Fool UK.

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Christopher Ruane 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