Investors generally want their investments to pay off for them. Dividend investors also want their investments to pay them. That payment usually comes in the form of dividends -- cash payments companies make to shareholders as a way to share profits. Collect enough dividends and you can go some way toward paying your living expenses.
So how do you maximize your dividends and get the most bang for your buck? One way is to buy stocks with the highest yields. But be careful chasing stocks that pay huge dividends. They can end up being yield traps: Companies that ultimately lose you your investment because they're fundamentally flawed.
In my search for solid, high-yielding stocks, I've found at least one that has so far managed to avoid becoming a yield trap. This dividend stock yields nearly 10% today but investors can buy it and still sleep well at night. If you were to invest $102,750 in it, this stock would pay out $10,000 in annual income.
Get familiar with British American Tobacco
British American Tobacco (BTI -0.51%) is a global company that sells tobacco products, as well as smokeless products like vapes, oral pouches, and heat-not-burn devices. Its more popular brands include:
- Cigarettes: Camel, Newport, Lucky Strike
- Chewing tobacco: Grizzly
- Smokeless: Vuse (electronic cigarettes), Velo (pouches), Glo (heated tobacco)
Overall, the British company pulled in roughly $34 billion in revenue (26.9 billion British pounds) in 2023. It owns a significant stake in ITC, a company in India that sells tobacco, among a diversified range of other businesses. British American's investment is worth roughly $15 billion after management recently sold a small chunk to fund share repurchases.
Most importantly, British American Tobacco is an excellent dividend stock. The company pays quarterly dividends that added up to $2.92 per share in 2023, a 9.75% yield at the current share price.
Why you can trust the dividend
As noted above, really high dividend yields are usually a red flag that the company is in trouble. The fact that British American Tobacco is a non-U.S. company adds another potential worry for many U.S. investors. So why should you trust the dividend? Two primary reasons:
First, the company's financials easily support the payout. Over the past five years, the dividend payout ratio has bounced between 50% and 60%. It hasn't come close to a situation where management can't afford to pay its dividend with cash. Tobacco products are habit-forming, so the company's revenue is steady.
The inconsistency you see below is because British American Tobacco pays a dividend in its native currency, which must be converted for the American-listed shares.
BTI dividend data by YCharts.
Imagine, hypothetically, that cash flow plummets 50%. British American Tobacco still has $15 billion in ITC stock that it could liquidate to get through a rough patch without borrowing money.
The second reason is that dividends are ingrained in the culture of tobacco companies. Shareholders often hold the stocks only for the big dividends. You can rest assured that management will jump through hoops to maintain dividends if things get hairy.
How to buy $10,000 in annual income
You shouldn't put all your money into a few stocks, so don't worry if you lack the funds to buy this much stock responsibly -- you'll still get that high yield on whatever amount you can invest.
Investors get $2.92 for every share of British American Tobacco they own. In other words, investors need 3,425 shares to generate $10,000 in annual dividend income. Based on the current share price, that's a total investment of $102,750.
The cool part is that it becomes its own little cash cow. The dividends are enough to max out an IRA, and $10,000 can grow to life-changing wealth if you pick the right stock. You could spend the money on living expenses or whatever pleases you.
That flexibility is part of what makes dividend investing so appealing in the first place.
