I suspect it would be hard for dividend investors not to salivate over the potential offered by British American TobaccoThe company’s 9.5% dividend yield (NYSE:BTI), however, is well aware that such high yields usually come with significant risks, which is precisely the case here.
If you’re looking for a reliable dividend stock with a high (but not too high) yield, you might be better off switching gears and looking at Real estate income (NYSE:O) and its yield of about 6%. Here’s why.
I don’t like British American Tobacco’s business
British American Tobacco has a huge dividend yield, and that dividend is likely to be maintained in the short term. But I invest in stocks with the idea that I will hold them for decades. With that mindset, I prefer to buy companies that I believe have long-term growth potential. At the moment, that is not the case with British American Tobacco.
The company’s flagship product is cigarettes. Smoking cigarettes has been out of favor for years, leading to a decline in the company’s cigarette volume of about 21% over the past five years. That should worry long-term investors. consumer staples company has witnessed this type of decline in its most important business.
Management is working to create new business segments to offset this decline, but for now, the only way to address the decline in the cigarette market is to raise prices. This is not a long-term solution, and only the most aggressive investors should consider doing business with British American Tobacco until the company’s transition away from smoking begins to gain momentum.
Boring Realty Income is a Better Dividend Stock
A better option for dividend investors would be Realty Income, the largest net lease real estate investment trust (REIT). Net leases require tenants to pay most of the operating expenses at the property level. The REIT offers a very attractive dividend yield of nearly 6%, backed by a dividend that has been raised for a considerable 30 years and continues to do so. What you lose in yield relative to British American Tobacco, you make up for in the quality of the underlying business.
For example, Realty Income, with a market cap of $45 billion, is more than three times the size of its nearest competitor. The real estate investment trust’s balance sheet is investment grade, and its portfolio spans across North America and, increasingly, Europe.
There are several positives to take away from this situation. First, Realty Income’s size and financial strength give it advantageous access to the capital markets. It can therefore afford to bid aggressively on acquisitions and still make a profit. Second, its size allows it to take on deals that its smaller peers would not even consider. This includes simply buying other REITs as Realty Income consolidates the sector. Third, with its exposure to Europe, Realty Income is contributing to the development of a large market that is only just beginning to use the net lease model. It therefore has multiple levers for growth relative to its domestically focused peers.
But the real lesson from comparing Realty Income to British American Tobacco is that the REIT is building from a position of strength. The cigarette maker is simply trying to find a new line of business, bleeding its cash cow for the cash it needs to support its outsized dividend and capital investment needs. If you’re hoping to live off your dividends for decades, Realty Income should seem like an easy winner in this matchup.
Reduce the risk: a 6% return remains very attractive
The S&P 500 offers a dividend yield of 1.3%. You can achieve that yield by taking on huge risks through an investment like British American Tobacco. If you do, you’ll have to watch the company’s cigarette business decline closely and pray that it finds a way to offset the ongoing decline. Or you could just buy a good company with a growing business like Realty Income, which has a still-generous, but very sustainable, 6% yield. The risk/reward balance makes Realty Income the easy choice for me.
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Reuben Gregg Brewer has a position in Realty Income. The Motley Fool has a position in Realty Income and recommends Realty Income. The Motley Fool recommends British American Tobacco Plc and recommends the following options: long January 2026 $40 calls on British American Tobacco and short January 2026 $40 puts on British American Tobacco. The Motley Fool has a position in Realty Income … disclosure policy.
I Wouldn’t Touch This Stock With a 10-Foot Pole – Here’s the High-Yield Stock I’d Buy Instead was originally published by The Motley Fool
