I’d buy this FTSE 100 stock today to start making powerful passive income for retirement
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I wish to begin producing passive revenue as we speak for my retirement. That means, when the time comes, I’ll have revenue streams permitting me to stay a extra snug life-style.
If I used to be sitting on some financial savings, I feel the perfect factor to do could be to purchase dividend shares. To do this, I’d flip to the FTSE 100.
Its common yield is 3.9%. However I wish to goal a better return than that. The FTSE 100 has returned 7-8% since its inception in 1984, so I feel one thing round that’s a practical intention over the long term.
I’ve bought a inventory in thoughts to assist me get there. Let’s discover.
Concentrating on the perfect
The corporate in query is British American Tobacco (LSE: BATS). As I write, it yields a whopping 10.2%. That’s the third highest on the FTSE 100, simply behind Vodafone and Phoenix Group Holdings.
So as to add to that, the corporate is a Dividend Aristocrat. These are firms which have paid and elevated their dividend fee over a protracted interval. Within the case of British American Tobacco, that’s 1 / 4 of a century!
Dividends are by no means assured. However a observe document like that may be a robust signal that the enterprise will hold paying out. That fills me with confidence.
What’s extra, with the money it receives from promoting its stake in Indian producer ITC, it’s suspected the agency will provoke a brand new share buyback scheme. As a shareholder, that’s extra excellent news to stay up for.
Robust instances forward
That’s all effectively and good, however there’s little question the enterprise faces a number of challenges.
The largest menace is the falling recognition of smoking. Final yr the UK authorities launched a regulation which means any youngster who’s 14 or youthful won’t ever have the ability to legally purchase cigarettes. Within the instances forward, I’d anticipate different governments to comply with go well with (that’s in the event that they haven’t already).
It additionally took an impairment cost of over $30m lately, largely linked to its struggling US manufacturers. The inventory plummeted off the again of the information. Any additional unfavorable updates might be detrimental to its share value.
I’m nonetheless assured
So what makes me assured that British American Tobacco can carry out strongly within the years to return? Properly, its low-cost. Buying and selling on round six instances earnings, the inventory appears to be like like good worth.
On high of that, it’ll be many years earlier than smoking turns into extinct. Final yr, the enterprise bought practically 600bn cigarettes. That’s nonetheless an enormous market.
What’s extra, the agency is making robust progress with its New Classes division because it continues to diversify. This contains non-combustible items similar to vapour merchandise. Final yr, it generated a revenue for the primary time, two years forward of the agency’s authentic goal.
Reinvesting my dividends
Diversification is vital to a profitable portfolio, so British American Tobacco wouldn’t be the one inventory I owned to focus on highly effective passive revenue. Nonetheless, if I didn’t personal the inventory already, I’d snap up some extra shares.
With the dividend funds I obtain, I reinvest them into shopping for extra shares. That means, I can profit from ‘dividend compounding’. Doing this can be a prime instance of how placing my cash to work as early as doable will supply me a extra lavish retirement.