FTSE 100 tobacco and nicotine alternative merchandise producer British American Tobacco (LSE: BATS) is ignored by many on moral grounds.

As a former heavy smoker myself, I perceive this. However I’m not ignoring the inventory. Moderately, I’ve used it to recoup a number of the huge sum of money I spent on cigarettes over 35 years

Huge dividends

In 2022, the corporate paid 217.8p a share in dividends. Earlier than that it paid 215.6p in 2021, 210.4p in 2020, and 203p in 2019. These yielded 6.7%, 7.9%, 7.8% and 6.5%, respectively.

Final yr, it paid 230.89p. With the shares at £24.64, this made the yield 9.4% — one of many highest within the FTSE 100.

And analysts forecast that the yields will rise to 9.6% in 2024, 10% in 2025, and 10.5% in 2026.

Big passive revenue streams

Passive revenue is cash made out of minimal effort, corresponding to dividends from shares. In contrast to once I smoked, my pleasure from these common funds shouldn’t be accompanied by a hacking cough!

So, £17,000 (the typical UK financial savings account quantity) would purchase 690 shares in British American Tobacco.

These would pay £1,598 in dividends within the first yr, primarily based on the present 9.4% yield.

The identical quantity can be paid yearly if the dividend stayed the identical and I withdrew the funds as money. So, after 10 years, an additional £15,980 would have been made, and after 30 years an extra £47,940.

Nevertheless, the returns would dramatically enhance if the dividends have been used to purchase extra of the shares (often called ‘dividend compounding’).

An additional £26,361 can be made as a substitute of £15,980 after 10 years by doing this. After 30 years, an extra £265,090 would have accrued as a substitute of £47,940.

The entire British American Tobacco funding can be price £282,090 by then. It might generate £26,516 yearly in passive revenue, or £2,210 every month!

Share price undervaluation

Making spectacular returns is not any use if they’re then worn out by share price losses, in fact. Consequently, I at all times search for high-yield shares which might be additionally undervalued in opposition to their friends. That manner, there’s much less likelihood of huge price falls taking place over the long run.

A danger within the shares is that its opponents are extra profitable in transitioning to nicotine substitute merchandise. There additionally stays a risk of authorized motion from former people who smoke for alleged injury executed to their well being.

Nevertheless, analyst forecasts are that the agency’s earnings will enhance by a whopping 51.7% a yr to the top of 2026.

Furthermore, a discounted money stream analysis reveals the inventory to be 53% undervalued at its current price of £24.64. So, a good worth per share can be £52.43, though they could go decrease or larger than that.

If I didn’t already personal the shares, I’d purchase them right this moment for his or her very excessive yield and excessive relative undervaluation.