At today’s price, buying 1,000 British American Tobacco shares generates a second income of…

Despite the lack of popularity of tobacco stocks among ESG investors, the British American Tobacco (LSE:BATS) share price has enjoyed a solid rally so far in 2025. At the same time, the company has proven to be a remarkable source of passive income over the years.

Even with constant pressure from regulators as well as higher health awareness from consumers, strong pricing power has enabled tobacco businesses to continue being exceptionally cash-generative enterprises.

This lack of demand from ESG investors, paired with chunky financial flexibility, has translated into an impressive dividend yield that’s typically hovered between 6% and 9% over the last decade. Today, the payout from British American Tobacco shares is currently closer to 6.8%.

That means anyone with the luxury of having a £35,700 lump sum of capital lying around can grab 1,000 of this dividend-paying business and instantly unlock a £2,400 second income.

Management isn’t blind to the steadily declining volume of cigarette consumption worldwide. And since pricing power has its limits, the firm has been actively investing in healthier alternative products such as vapes and heated tobacco to evolve alongside the shifting landscape. But what does that mean for its impressive dividend?

Here’s what the experts are saying

British American Tobacco has already declared its intended dividend payments for 2025 at 60.06p per quarter, bringing the total to 240.24p, with the final payment arriving in February 2026. However, beyond that, analysts are predicting a continued steady rise in shareholder rewards.

Is it likely that the company will continue to hike dividends moving forward? Its track record of increasing shareholder payouts each year extends well beyond 25 consecutive years – a winning streak that management will likely want to maintain.

Of course, that will only be possible if the group generates sufficient cash flow to sustain higher dividends in the future. That’s something its New Categories product line is aiming to secure. Management’s trying to reduce its reliance on traditional cigarettes by generating 50% of revenue from these healthier alternatives by 2035.

Is that likely? It certainly seems possible, looking at the recent performance of these new products. For example, nicotine pouch sales in the US grew by 200% last year, with total alternative product sales reaching £3.4bn.

In other words, the company’s already 15% of the way towards its target with 10 years still to go. And with management anticipating £2bn in cost efficiencies by 2030, it’s reasonable to be optimistic, in my opinion.

What could go wrong?

While sales of its cigarette alternative products are growing rapidly, profits remain somewhat elusive. And unlike cigarettes, it seems consumers have far less brand loyalty. That could become problematic in the future as it limits British American’s pricing power.

Meanwhile, the regulatory pressure on cigarettes isn’t disappearing anytime soon. In fact, several developed countries like Canada, Sweden, New Zealand, and even the UK are aiming to become smoke-free, with less than 5% of the adult population smoking by 2030.

Needless to say, the clock’s ticking. And if the firm’s portfolio transition fails to materialise on time, the British American Tobacco share price could be in for a bumpy ride, including its dividend. Personally, the risk just seems too high.

The post At today’s price, buying 1,000 British American Tobacco shares generates a second income of… appeared first on The Motley Fool UK.

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Zaven Boyrazian has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.

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