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In 2025, the full UK State Pension currently sits at £230.25 a week, adding up to £11,975 a year. Yet by investing in high-yield income opportunities, the same amount can be earned by investors who haven’t yet reached the minimum age required to claim the State Pension.
In fact, at its current impressive yield of 6.3%, a total of 4,985 British American Tobacco (LSE:BATS) shares can offer the same passive income to any investor who has the cash. So how much money do investors need to start earning this passive income today? And is British American Tobacco actually a smart investment?
Crunching the numbers
For years, the popularity of British American Tobacco among income investors hasn’t waned. While this sin stock doesn’t get much love from ESG investors, the addictive nature of its products makes for some nice pricing power. And that’s ultimately translated into a consistent high-yield payout.
At a price of 3,792p per share, snapping up 4,985 shares today will set an investor back just over £189,000. Obviously, that’s not pocket change. Luckily, even those of more modest means can still build to this sizable position over time.
Assuming the tobacco stock maintains its 6.3% payout moving forward, investing £500 each month at this rate of return would build a £189,000 portfolio in about 17 years. And when factoring in the extra potential return from capital gains, this timeline only gets shorter.
Of course, we’re making a big assumption that dividends will continue to flow. The group’s long track record of consistently hiking its payout certainly gives an impression of sustainability. But with the smoking landscape shifting, can this hiking streak truly continue?
Risk versus reward
As consumer health awareness increases, the number of smokers in key markets like the UK and US are steadily declining – a trend that’s only being accelerated by increasingly strict regulation. However, management isn’t blind to this threat and has been diversifying the business into healthier categories with products like nicotine pouches and electronic cigarettes.
So far, this foray into new categories seems to be off to a good start. Its Velo brand has already captured 7.9% of the US market, with Vuse becoming the biggest vaping brand in the US, Canada, France, the UK, and Germany.
Despite this encouraging progress, there’s still a big question mark about whether these new products will be able to replace the revenue and earnings of its traditional tobacco products. Illicit single-use vapes have already created new growth challenges in North America. And with consumers showing far less brand loyalty among its new product categories versus cigarettes, it’s not clear whether British American Tobacco’s pricing power will continue.
The bottom line
This evolving tobacco enterprise presents an interesting defensive income opportunity with some transformation potential. But it also carries significant execution and regulatory risks. And if management isn’t able to overcome these challenges, then the group’s long-term income prospects could become compromised.
British American Tobacco could still have a valuable role to play for investors seeking to replicate the State Pension and is worth further research. However, personally, I would be actively considering ways to diversify the risks with other high-yield opportunities, just in case the company falls short of expectations.
