Could this FTSE 100 7% yield make you rich or cost you a fortune?

Royston Wild considers whether this big-yielding FTSE 100 (INDEXFTSE: UKX) stock could make you a fortune or leave you with big losses.

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There’s an abundance of FTSE 100 stocks that look mighty tempting at current prices. Take British American Tobacco (LSE: BATS), for example. Right now it trades on a rock-bottom price-to-earnings (P/E) ratio of 9 times and carries a 7.2% corresponding dividend yield.

In my eyes, though, this particular mega-cap is cheap for a reason. Well, two reasons.

Demand for its traditional combustible products remains in a state of sharp contraction – British American Tobacco saw sales volumes in the US, the world’s biggest market, slump 6% in the first six months of 2019. And off-take is likely to keep worsening not just here but across the globe as lawmakers use a combination of tax duty hikes, health campaigns and bans on sale and usage to lessen smoker appetite still further.

The shape of vape

A bigger worry more recently, though, has been the increasing attacks legislators have staged on e-cigarettes and other so-called tobacco heating products (or THPs).

A number of health concerns surrounding these technologies has arisen over the past few years and led to a plethora of new laws on these products. Indeed, such is the scale of pressure on lawmakers to act that New York legislators rushed through emergency legislation over the weekend to ban the sale of flavoured e-cigarettes following an explosion in the number of medical cases said to have been caused by the use of vapourisers and similar products.

Even President Trump has been quick to chime in on the issue in recent days. The commander-in-chief floated proposals that could see flavoured e-cigarettes – once considered the saviour of battered Big Tobacco – removed from retailers’ shelves across the US. It’s a colossal gamble to expect the cigarette maker to turn back into the monster profits generator of yesteryear as it struggles on all fronts.

A hotter dividend pick

Clearly, I’m not one to believe that British American Tobacco has the tools to make investors the sort of money to help them retire early. In fact I reckon it could end up costing you a fortune. But I don’t believe the same can be said for Ferguson (LSE: FERG).

This particular FTSE 100 share might not carry the same sort of yields as the tobacco titan – a reading of 2.9% for 2019, as you’re asking – nor the low earnings multiples. At current prices it trades on a P/E multiple of 14.8 times.

But don’t look away yet; these numbers still provide a pretty decent bang for your buck. Besides, these less-appealing figures reflect the market’s belief that Ferguson is a better long-term option for investors than British American Tobacco.

The plumbing and heating product supplier hiked its ordinary interim dividend 10% in March, and thanks to its exceptional cash generation, it is in great shape to keep raising payouts at a healthy rate and to continue pursuing earnings-boosting M&A opportunities. To my mind Ferguson has all the tools to make investors some truly titanic returns in the years ahead.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Royston Wild has no position in any of the shares mentioned. 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.

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