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I’d buy 1,035 shares of this FTSE stock for a £200 monthly income

Close-up of British bank notes

I’m looking for reliable high dividend yield stocks that I can buy to provide a regular second income. Today I want to look at a FTSE stock with a near-7% yield that I think should deliver reliable dividends for many years to come.

Although dividends aren’t guaranteed and are not a substitute for cash savings, this company has paid a rising dividend for more than 20 years. I don’t see any reason why this pattern should change. Indeed, I’ve already invested a small part of my own portfolio in this business.

A defensive choice

The company in question is FTSE 100 tobacco giant British American Tobacco (LSE: BATS). Although this is undoubtedly a sin stock, tobacco is also generally seen as a very defensive business. Consumer purchasing habits remain fairly steady, even during a recession.

BATS’ brands include vaping brand Vuse (the US market leader), as well as well-known cigarette brands such as Dunhill and Lucky Strike. The BATS share price has climbed 30% over the last year as investors have looked for safe haven stocks providing a reliable income.

Despite this gain, BATS still has one of the highest dividend yields in the FTSE 100, with a 2022 forecast yield of 6.9%. Broker forecasts suggest this payout should rise next year, giving a prospective 2023 yield of 7.4%.

How I’d target £200 monthly income

BATS pays a quarterly dividend, dividing its annual payout into four equal amounts. To generate a monthly income, I’d hold my dividends in a savings account and withdraw them gradually each month.

My calculations tell me that I’d need 1,305 shares of BATS stock to achieve my target of a £200 monthly income. That’s based on a share price of 3,360p and would be equivalent to an investment of £34,800.

This is obviously a fairly hefty investment. My plan would be to build up this position gradually, investing cash when possible.

Fortunately, BATS’ high yield means that even a much smaller investment should still produce a useful income for me.

Is BATS’ yield really safe?

For the last 20 years, investors have been predicting that falling smoking rates would put the tobacco industry into decline.

So far, this doesn’t seem to have happened. But I think it’s fair to say that the risk remains in western markets. Ever-tighter regulation and rising pack prices may discourage younger generations from taking up smoking.

However, BATS is working hard to offset this risk by becoming a market leader in so-called reduced-risk products. The company’s Vuse vaping brand is the market leader in the US and is expanding fast in other western markets.

During the first half of 2022, Vuse and other non-combustible products generated around 10% of BAT’s sales. The company expects this division to make a meaningful contribution to the group’s profits by 2025.

Ethical concerns aside, I think British American Tobacco looks like a sensible buy for dividend income.

The post I’d buy 1,035 shares of this FTSE stock for a £200 monthly income appeared first on The Motley Fool UK.

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Roland Head has positions in British American Tobacco. The Motley Fool UK has recommended British American Tobacco. 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.