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At first glance, revenue sharing is a no-brainer. Deposit a little extra money into a company with this type of stock and get a percentage of your money back two to four times a year. Anyone looking to generate an income stream, even just a few hundred pounds, might be wondering why they should look elsewhere.
We can even calculate in advance how much our income stream will cost us. Of course, it's not an exact science. Dividends change from year to year, sometimes due to company performance and other times due to broader factors that have nothing to do with the company itself. But as long as we invest long enough for the ups and downs to smooth out, a rough estimate isn't too difficult to make.
In theory
Let's start with a monthly income stream of £300. Over the year it will be £3,600 and we expect our income shares to pay us dividends. To achieve this, some of the world's largest payers FTSE 100 could require an initial outlay of £45,000, with a dividend yield of 8%. That's a lot more than you would get from a savings account or buy-to-let and we can get all the money tax-free with the smart use of a stocks and Shares ISA.
Before we get ahead of ourselves, let's remember that theory is quite different from practice. In this case, very few companies pay such a high yield, and those that do typically don't offer much in terms of share price growth. Maybe they are in a declining sector. Perhaps a lot of debt is weighing heavily on the valuation. Whatever the issue, it's important to research the highest-paying stocks before going short.
An action like this is British American Tobacco (LSE: BATS). I doubt many people are expecting the creator of dunhill and Lucky Strike It appears to be a fast-growing company, but the problems are perhaps even more serious if you look under the hood.
Will it grow?
The recent growth is due to rising prices for the company's cigarette packs, and there isn't much room left for that. The taxes imposed on them are also very high and no one will complain too much if they continue to increase.
Consumption in key markets has been falling for decades and the potential antidote to that problem, non-combustibles like vaporizers, account for only a small fraction of sales. The threat of legislation also looms over these products.
The plus side is that British American pays a strong dividend that continues to grow. The yield now sits at 8.71%, well above our previous hypothetical figure and well covered by the company's earnings, meaning little threat to upcoming payments.
Future revenues will also be supported by global cigarette consumption, which is expected to increase through 2030, mainly thanks to “status symbol” effect in middle-income countries.
For anyone looking to invest in income stocks to earn an amount of £300 a month or so, I think this is a stock worth considering.
