There are several appealing characteristics associated with the income-focused approach to investing. One of the best may be the easy-to-measure progress of the strategy. As an income investor, you can clearly know where you stand on the road to financial independence based on your dividend income versus your expenses.
Whether you're just getting started or you are a seasoned investor, an extra $500 in annual dividend income can be a nice step toward reaching financial independence. If you invest $3,000 each in these two stocks, you could add approximately $500 in starting passive income on an annualized basis to your portfolio.
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1. British American Tobacco: Positioning itself for a post-combustible future
Selling tobacco products around the world, British American Tobacco (BTI -0.51%) is a leader within its industry. Thanks to a portfolio that includes the likes of Camel and Newport cigarettes, Glo heated tobacco, Vuse vapor, and Velo nicotine pouches, the company boasts a $72 billion market capitalization. For context, this market value is surpassed by only Philip Morris International and Altria Group.
Recognizing the massive consumer demand for products that are viewed as less harmful than cigarettes, British American Tobacco has spent the last decade building its noncombustible brand portfolio. The company's noncombustible user base just reached 24 million as of June 30 -- 1.5 million more than the year-ago period alone. Thanks to this healthy growth rate in its user base, the company anticipates that its new category will achieve profitability in 2024.
British American Tobacco is working to expand its products to more markets and further improve its existing products. This is why the company's share of noncombustible revenue as a percent of total revenue should climb much further from its 16.6% rate as of the first half in the years ahead. That is expected to power 3.6% annual earnings growth over the next five years.
British American Tobacco offers income investors an 8.9% dividend yield, making the S&P 500 index's 1.6% yield pale in comparison. And given that the dividend payout ratio is poised to come in around 55% over the next 12 months, the payout is also easily covered by profits. Investors can pick up shares of British American Tobacco at a forward price-to-earnings (P/E) ratio of 6.5, which is a bargain compared to the tobacco industry average forward P/E ratio of 11.8. A $3,000 investment would purchase 95 shares of the stock at the current $32 share price, which would generate $266 in annual starting dividend income.
2. Medifast: Weight loss services are healthy for its financials
As is the case in most economically developed countries, the U.S. is struggling with the health consequences that go along with excess weight among its citizens. An astonishing three out of four (73.1%) American adults are overweight or obese. An issue this widespread in nature is going to take all the tools available to solve. This includes weight loss pills from the likes of Eli Lilly and coaching services from the weight loss and nutrition company Medifast (MED 0.63%).
Over its history, Medifast's weight loss approach based on substituting harmful eating habits and inactive lifestyles with nutritious eating habits and active lifestyles has helped to transform 3 million lives. Considering its total addressable market is in the hundreds of millions in the U.S. alone, the company likely has plenty of growth left in its future.
Medifast's 7.8% dividend is less easily covered than British American Tobacco's, with the payout ratio projected to come in at nearly 87% in the coming 12 months. But the good news is that this is already baking a tightening economy into the company's future results. And with no debt obligations on its balance sheet as of June 30, the company's dividend is arguably sturdier than it looks.
Medifast's forward P/E ratio of 11.1 is roughly half of the personal services industry average forward P/E ratio of 21.2. A $3,000 investment would purchase 35 shares of the stock at the current $85 share price, which would produce $233 in beginning annual dividend income.
