One dividend stock I’m considering adding to my holdings to boost my passive income stream is British American Tobacco (LSE:BATS).
Cigarette maker
BATS is a multinational business that manufactures and sells tobacco products in more countries around the world than any of its competitors. It is the largest cigarette maker in the world based on net sales. Some of its best known brands include Dunhill, Lucky Strike and Pall Mall.
So what’s been happening with the BATS share price recently? Well, as I write, the shares are trading for 3,292p. At this time last year, the shares were trading for 2,743p, which is a 20% increase over a 12-month period.
Risks involved
I do believe British American Tobacco is a good dividend stock; however, it faces some credible headwinds that I must note.
The tobacco industry has come under pressure in recent years due to the health effects of smoking. Governments worldwide are attempting to encourage smokers to quit. One of the ways it can look to do this is to introduce tightened regulation which would affect how tobacco firms like British American Tobacco operate. Tighter regulation could hamper sales and performance as well as any returns I hope to make.
Another issue facing smoking firms like British American Tobacco is the rise in popularity of health-consciousness and alternatives to smoking. These alternatives are becoming more prevalent in more developed countries where consumers can afford them. If sales were affected, the profit margins could be squeezed as well as any passive income I hope to make.
A dividend stock I’d buy
So when looking for the best passive income stocks, I look for certain characteristics. First, are the shares expensive to buy? Well, I believe BATS shares are currently undervalued on a price-to-earnings ratio of just 11. This is below the FTSE 100 average of 15. The general consensus is that a P/E ratio below this benchmark can be considered good value for money.
The shares look cheap on paper, but how much of a passive income stream will I make? For any dividend stock, I always review the dividend yield. British American Tobacco’s current yield is close to 7%. Again, looking at the FTSE 100 average, which is 3%-4%, the BATS yield is close to double this. Another box ticked for me.
Now that I know the shares look cheap and the yield is attractive, I want to know if these returns are a flash in the pan or does British American Tobacco have a consistent record of performance and dividend payouts? Well, the company’s track record of performance looks good. It has recorded strong revenues close to £25bn each year for the past four years.
In terms of dividend payments, it has a consistent record of payouts too. I do understand past performance is not a guarantee of the future, however, and that dividends are not guaranteed.
I’d be happy to add British American Tobacco shares to my holdings to passive income. The shares have all the characteristics on my checklist of what I believe makes a good dividend stock.
