We recently compiled a list of the 7 Dividend Stocks with 10%+ Yield. In this article, we are going to take a look at where British American Tobacco p.l.c. (NYSE:BTI) stands against the other dividend stocks with 10%+ yield.
Dividend stocks have kept their appeal among investors due to the steady yields and income they provide. However, in the past year or so, all eyes have been on anything related to artificial intelligence. These stocks have not only surged but have also lifted the overall market much higher compared to dividend-paying stocks. Nevertheless, tech stocks have also joined the dividend game, unable to resist the trend as several major companies began distributing dividends starting in 2024. This highlights the financial strength of these companies, as they generate more cash than they currently need to reinvest.
Despite the lower yields on these tech stocks, their dividend payouts are punching above their weight contributing to the overall payments made by companies in the broader market. According to a report by S&P Dow Jones Indices, in the second quarter of 2024, companies listed in the index collectively paid out $153.4 billion in dividends, marking an increase from $151.6 billion in the previous quarter and up from $143.2 billion in the same period last year. The report highlighted that Alphabet’s dividend initiation contributed $9.3 billion to the Q2 2024 increase, while initiations from Brookings, Meta Platforms, and Salesforce in Q1 2024 accounted for $7.2 billion, collectively making up 53% of the S&P 500’s year-to-date dividend gain. Howard Silverblatt, senior index analyst at S&P Dow Jones Indices, said that although the gains without the new initiations are expected to achieve a record dividend payment for 2024, their ongoing commitment to dividend payouts will notably boost the total payout, prompting investors and boards that do not currently pay dividends to reassess their strategies.
Dividend investors often debate between dividend yields and dividend growth, not fully realizing that dividend yield is crucial for sustained dividend growth. For instance, in the case of the Dividend Aristocrats Index, which has raised dividends for 25 consecutive years, maintaining a high yield hasn’t been at the expense of growth. Over the past 26 years ending in 2023, the index consistently outperformed its benchmark with higher yields, typically ranging between 2% and 2.9%. On average, the index boasted a yield of 2.5%, significantly higher than the market average of 1.8%, according to a report by S&P Dow Jones Indices. To learn more about high-yield stocks, read Very High Yield Dividend Stocks With Upside Potential.
However, it’s worth noting that high dividend yields aren’t always the most practical choice. Analysts generally suggest targeting dividend yields in the range of 3% to 6%, as this range typically offers potential for both dividend growth and appreciation in stock value. In one of its reports, an Illinois-based financial planning company, Nuveen, highlighted that global companies with moderate dividend yields (between 0% and 3%) tend to demonstrate stronger earnings growth, profitability, and profit margins compared to those with higher yields or those that don’t pay dividends at all. These factors also contribute to reducing risk, particularly during periods of market volatility.
The debate between these two strategies appears endless. We believe that combining growth and yields can present better results for investors. How investors navigate yield traps ultimately depends on their caution and strategy. With that, let’s take a look at some of the best dividend stocks with over 10% yield.
Our Methodology:
For this list, we used a stock screener and selected dividend stocks with yields above 10%, as of July 16. Among those stocks, we chose companies that have relatively stable dividend histories, however, a lot of the companies on the list don’t have a consistent record of paying dividends due to their exceptionally high yields. They either stopped or reduced their dividend payments in 2020 due to the pandemic or because they were facing financial difficulties. We’ve also mentioned the hedge fund sentiment for each stock using Insider Monkey’s Q1 2024 database. The stocks are ranked in ascending order of their dividend yields, as of July 16.
Why are we interested in the stocks that hedge funds pile into? The reason is simple: our research has shown that we can outperform the market by imitating the top stock picks of the best hedge funds. Our quarterly newsletter’s strategy selects 14 small-cap and large-cap stocks every quarter and has returned 275% since May 2014, beating its benchmark by 150 percentage points. (see more details here).
A close-up of an array of tobacco products, emphasizing the selection and consumer choice.
British American Tobacco p.l.c. (NYSE:BTI)
Dividend Yield as of July 16: 11.48%
British American Tobacco p.l.c. (NYSE:BTI) ranks fourth on our list of the best dividend stocks with over 10% yield. The company specializes in the manufacturing of cigarettes, tobacco, and various other nicotine products. Tobacco companies are transforming their strategies amidst declining smoking rates in the US. BTI has diversified its product lineup by introducing new offerings in its New Categories segment, which includes alternative tobacco and nicotine products beyond traditional cigarettes. This shift aims to cater to evolving consumer preferences and regulatory changes by providing innovative and potentially less harmful smoking alternatives. By 2023, the New Categories segment not only achieved profitability but also demonstrated ongoing revenue growth driven by increased volume, especially from brands like Vuse and Velo. This success has allowed the segment to reach profitability two years earlier than initially expected.
British American Tobacco p.l.c. (NYSE:BTI) benefits a lot from the stability of the nicotine market, particularly during periods of market downturns. For example, despite the market experiencing one of its worst declines in 2022, BAT managed to deliver over a 20% return to shareholders. Though the market might be facing problems due to dropping smoking rates, the shift toward vaping has somewhat stabilized the industry, which is good news for companies dealing with these products. The use of vaping among US adults increased by nearly 40% between 2019 and 2023, as reported by YouGov. These companies also enjoy substantial profit margins and require minimal capital expenditures. Moreover, they are spared from extensive research and development costs, allowing them to distribute a significant portion of their earnings to investors.
British American Tobacco p.l.c. (NYSE:BTI) is a strong dividend payer as evident from its cash flow. The company expects to generate £40 billion ($50.57 billion) in free cash flow before dividends over the next five years. It also outperforms on metrics like dividend yield and valuation when compared to its competitor, Philip Morris International Inc. (PM). BTI boasts an impressive dividend yield of 11.48% and trades at a forward price-to-earnings ratio of only 7.23. In contrast, PM offers a dividend yield of 4.9% with a higher forward price-to-earnings ratio of 16.75. This stark comparison highlights that BTI is significantly cheaper and provides more than double the dividend yield compared to PM. British American Tobacco p.l.c. (NYSE:BTI) currently offers a quarterly dividend of $0.743 per share and has a dividend yield of 11.48%, as of July 16.
At the end of March 2024, 19 hedge funds tracked by Insider Monkey reported having stakes in British American Tobacco p.l.c. (NYSE:BTI), down from 22 in the previous quarter. These stakes are collectively valued at over $588.6 million.
Overall BTI ranks 4th on our list of the best dividend stocks to buy with 10%+ yield. You can visit 7 Dividend Stocks with 10%+ Yield to see the other dividend stocks that are on hedge funds’ radar. While we acknowledge the potential of BTI as an investment, our conviction lies in the belief that some deeply undervalued dividend stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for a deeply undervalued dividend stock that is more promising than BTI but that trades at less than 7 times its earnings and yields nearly 10%, check out our report about the dirt cheap dividend stock.
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Disclosure: None. This article is originally published at Insider Monkey.
