I’d buy 1,039 shares of this stock to generate £200 extra income per month

Christopher Ruane explains how he’s already earning extra income by owning a blue-chip FTSE 100 dividend share — and would happily buy more today.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Close-up of British bank notes

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

A bit of extra income can often come in handy.

My own approach to that includes buying blue-chip FTSE 100 shares I hope can pay me dividends in future.

Here is an example of how buying 1,039 shares in one such business today could hopefully generate me £200 per month on average in extra income, hopefully for decades to come.

Industry with large free cash flows

As the latest dividend hike from Imperial Brands today (14 November) demonstrated yet again, tobacco is an industry with favourable economics.

Cigarettes are cheap to make, but the set-up costs for a factory act as a barrier to entry for casual competitors. Customers buy regularly and are willing to pay a high price premium over the manufacturing costs.

But Imperial is not the company I would choose for my extra income plan.

Instead, I am eyeing a larger FTSE 100 cigarette maker with a higher dividend yield — 9% versus Imperial’s 8%. It also has a better track record of dividend growth in recent years. Indeed, it has raised its payout every year this century so far.

British champion

The share in question is British American Tobacco (LSE: BATS).

Headquartered by the Thames, it operates in many markets globally. It is one of the world’s leading tobacco companies and owns premium brands including Lucky Strike, Rothmans and (in the US) Camel. That gives the business pricing power.

A quick look at its financial statements brings the point home.

Revenues last year grew 8% to £27.6bn. In a way, that sales growth is surprising. After all, perhaps the biggest threat to the company’s sales and profits is declining cigarette use in many markets. But the firm’s pricing power means it can push up selling prices to help offset falls in volume.

Meanwhile, post-tax profit was a whopping £6.9bn.

At a net profit margin of 24.8%, that underlines just how attractive the economics of the tobacco business remain.

Indeed, profits have actually been dragged down by losses in the company’s non-cigarette division. But they are expected to end this year and I think the division could help British American Tobacco keep growing in future.

Huge dividend payer

All of that adds up to financial firepower that lets the company pay a sizeable dividend. That provides extra income for thousands of shareholders, big and small, on a regular basis.

Tobacco companies often see their dividends as an important way to attract investors given their apparently limited growth prospects, although I think British American’s track record of growth suggests otherwise.

In any case, each share currently pays an annual dividend of around £2.31. That means if I bought 1,039 shares today, I ought to earn £2,400 in annual dividends. That is around £200 a month on average, although in practice dividends are paid quarterly.

The company has said it plans to keep raising the payout annually, although its high debt is a risk to free cash flows.

I already own British American shares and want to stay suitably diversified. But if I had spare cash today and could keep my portfolio sufficiently diversified, I would be happy to buy more of the shares for some extra income.

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.

C Ruane has positions in British American Tobacco P.l.c. The Motley Fool UK has recommended British American Tobacco P.l.c. and Imperial Brands Plc. 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.

More on Investing Articles

Investing Articles

As the Kingfisher share price drops on Budget fallout, should I buy?

The Kingfisher share price was on a strong 2024 run until the DIY group warned us of the possible effects…

Read more »

Investing Articles

2 passive income shares to consider for December 2024 onwards?

These are popular UK shares investors often buy for passive income from dividends, but are they actually good investments now?

Read more »

Young black woman using a mobile phone in a transport facility
Investing For Beginners

Down 34% in a month, is this FTSE 100 stock going to be demoted?

Jon Smith flags a FTSE 100 company with a recent poor performance he believes could see it soon drop out…

Read more »

British union jack flag and Parliament house at city of Westminster in the background
Investing Articles

Is the Diageo share price set to make a stellar comeback in 2025?

Harvey Jones thought the Diageo share price looked good value when he bought it after last year's profit warning, but…

Read more »

Investing For Beginners

It’s down 50%. Would it be madness for me to buy this value stock?

Jon Smith notes down a household value stock in the FTSE 250 that he thinks can rally in the long…

Read more »

Midnight is celebrated along the River Thames in London with a spectacular and colourful firework display.
Investing Articles

Up 70% and 80%! I’m thrilled I bought these two red-hot UK stocks exactly 1 year ago

Harvey Jones bought two UK stocks at the end of November last year, and both have smashed the market in…

Read more »

Investing For Beginners

Consider filling an empty Stocks and Shares ISA like this to hit five figures of second income

Jon Smith outlines how he could use stocks with both income and growth prospects to grow a Stocks and Shares…

Read more »

Investing Articles

These FTSE 100 shares could soar over the next year

FTSE 100 shares show strong potential as rate cuts loom. History shows stocks could gain more than 70% in the…

Read more »