Is this the FTSE 100’s best dividend share?

Like many investors, I appreciate a good blue-chip income share tucked away in my portfolio, quietly generating passive income streams year after year. One FTSE 100 share I own has a stellar track record when it comes to dividends.

Could it be the best FTSE 100 share for an income investor to consider?

High yield but a mixed share price track record

The share in question is British American Tobacco (LSE: BATS). Its dividend yield stands at 7.5%.

That is some distance from being the highest yield in the FTSE 100 index. Phoenix Group (LSE: PHNX) yields 9.2% and this week announced another increase in its annual dividend per share.

Still, British American’s yield puts it among the higher-yielding shares in the index even if it is not top of the board. At a 7.5% yield, £20k invested today would hopefully earn an investor £1,500 in passive income annually.

Outstanding track record of dividend growth

In reality, the passive income could be even higher than £1,500 each year.

British American has grown its dividend per share annually for decades. It has committed to keep doing so. As dividends are key to the investment case, I think the board sees this progressive dividend policy as being of primary importance.

A few other FTSE 100 members, such as Diageo and Spirax, have longer streaks of annual dividend growth. But, again, British American is among the index’s best-performing shares on this metric. Phoenix, incidentally, has grown its dividend over each of the last few years, but cut it less than a decade ago.

Mixed long-term income outlook

No dividend is ever guaranteed to last.

While British American’s track record of regular annual raises is impressive, it is not necessarily indicative of what to expect in future.

The business is highly cash generative. British American owns premium brands like Lucky Strike that give it pricing power. The addictive nature of nicotine also means that British American has pricing power. It has other strengths too, including a global distribution network.

But there is a big caveat here – cigarette demand is declining in many markets. While non-cigarette products like vapes may help British American offset that to some extent, the long-term volume outlook remains unclear – as does the question of whether profit margins can come anything close to, let alone match, those of cigarettes.

An income share to consider, with risks

That matters because it could impact cash flows at the FTSE 100 firm.

If that happens, it could mean the dividend comes under review. Rival Imperial Brands slashed its payout per share in 2020. British American could yet be forced to do the same at some point in future.

So, while its yield and record of dividend growth put it in the top tier of FTSE 100 dividend shares as far as I am concerned, there are significant risks here.

Based on that, I do not think that British American is definitely the best dividend share in the FTSE 100.

One of the best? Maybe.

I do see significant attractions. I continue to see this as a share income-focussed investors should consider.

The post Is this the FTSE 100’s best dividend share? appeared first on The Motley Fool UK.

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C Ruane has positions in British American Tobacco P.l.c. and Diageo Plc. The Motley Fool UK has recommended British American Tobacco P.l.c., Diageo Plc, and Imperial Brands Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.