Let’s end the week with a “pure” dividend yield play.
This is a blue chip stock that’s yielding 10% – an attractive yield in any market condition.
Some of that yield has come from a declining stock price, which is why I said this a “pure” yield play.
The good news is that despite this declining stock price, this company can easily cover its dividend – with one of the lowest payout ratios in the industry.
And the main focus of this pick is its attractive 10% yield, there’s also potential for capital gains – so don’t despair.
That’s because a large part of the share price decline is likely because the company has switched from share buybacks to paying down debt – which may be bad for the short-term share price but good for the long term price.
In fact, its forward dividend yield is lower than the current 10% – suggesting that the market expects the yield to fall as the stock price recovers.
That’s why now – while the stock price is low – may be the most opportune time to get in on this.
British American Tobacco p.l.c. (BTI)
A name that needs no introduction, BTI’s stock has taken a beating – down 15% this year, and over 35% over the past 5 years.
This isn’t unique to BTI – all tobacco stocks have been declining. But it has created a 10% current dividend yield for BTI, and that’s worth paying attention to.
With a payout ratio of only 74%, there’s little doubt as to whether BTI will be able to sustain its dividend. And despite the falling stock price, BTI is actually expected to post double-digit earnings growth thanks to its noncombustible product segment.
As mentioned, its forward dividend yield of 8.5% is lower than its current dividend yield, implying the market expects the price to increase, which would cause the yield to dip.
On top of all this, BTI is cheap, currently trading at a forward P/E ratio considerable below the industry average.
Combine all this, and this is why now may be the best time to get in on this stock – before the yield dips as the price rises.
To your wealth,
Felix @ Ace of Investing