I want to start generating passive income today for my retirement. That way, when the time comes, I’ll have income streams allowing me to live a more comfortable lifestyle.
If I was sitting on some savings, I think the best thing to do would be to buy dividend shares. To do that, I’d turn to the FTSE 100.
Its average yield is 3.9%. But I want to target a higher return than that. The FTSE 100 has returned 7-8% since its inception in 1984, so I think something around that’s a realistic aim over the long run.
I’ve got a stock in mind to help me get there. Let’s explore.
Targeting the best
The company in question is British American Tobacco (LSE: BATS). As I write, it yields a whopping 10.2%. That’s the third highest on the FTSE 100, just behind Vodafone and Phoenix Group Holdings.
To add to that, the company is a Dividend Aristocrat. These are companies that have paid and increased their dividend payment over a long period. In the case of British American Tobacco, that’s a quarter of a century!
Dividends are never guaranteed. But a track record like that is a strong sign that the business will keep paying out. That fills me with confidence.
What’s more, with the cash it receives from selling its stake in Indian manufacturer ITC, it’s suspected the firm will initiate a new share buyback scheme. As a shareholder, that’s more good news to look forward to.
Tough times ahead
That’s all well and good, but there’s no doubt the business faces a host of challenges.
The biggest threat is the falling popularity of smoking. Last year the UK government introduced a law that means any child who is 14 or younger will never be able to legally buy cigarettes. In the times ahead, I’d expect other governments to follow suit (that’s if they haven’t already).
It also took an impairment charge of over $30m recently, largely linked to its struggling US brands. The stock plummeted off the back of the news. Any further negative updates could be detrimental to its share price.
I’m still confident
So what makes me confident that British American Tobacco can perform strongly in the years to come? Well, its cheap. Trading on around six times earnings, the stock looks like good value.
On top of that, it’ll be decades before smoking becomes extinct. Last year, the business sold nearly 600bn cigarettes. That’s still a massive market.
What’s more, the firm is making strong progress with its New Categories division as it continues to diversify. This includes non-combustible goods such as vapour products. Last year, it generated a profit for the first time, two years ahead of the firm’s original target.
Reinvesting my dividends
Diversification is key to a successful portfolio, so British American Tobacco wouldn’t be the only stock I owned to target powerful passive income. However, if I didn’t own the stock already, I’d snap up some more shares.
With the dividend payments I receive, I reinvest them into buying more shares. That way, I can benefit from ‘dividend compounding’. Doing this is a prime example of how putting my money to work as early as possible will offer me a more lavish retirement.
