Investors who bought British American Tobacco (LSE: BATS) shares five years ago have already received 32% of their investment back in dividends. That’s a lot.
By contrast, investors who bought shares in Bunzl (LSE:BNZL) have received less than 14% of their initial outlay back. But that doesn’t tell the full story.
Dividends
While British American Tobacco has sent out a lot of cash to its shareholders, the total return has been much lower. This is the result of a falling share price.
The firm has sent out £10.51 per share. But the stock is down by £3.89, which means investors who bought the stock at the end of 2019 are actually up £6.62 per share.
At the end of 2019, the share price was £32.66, so £6.62 translates into a return of just over 20%. That’s worse than the FTSE 100 over the same time period.
It’s natural to think that the dividend should be the main focus for investors looking for passive income. But investors should be wary of falling into a trap here.
Growth
Bunzl’s dividend has been much lower, but it has more than made up for this with growth. As earnings have gone from £1.05 to £1.56, the stock has climbed 55%.
This has allowed shareholders to sell part of their stake to generate cash. In this way, they’ve been able to match the 42% distributed by British American Tobacco.
Furthermore, investors who bought Bunzl shares have been able to do this while still having an investment worth more than they paid for it. This is important.
A stock doesn’t have to pay a dividend to create a passive income opportunity – growth can do this just as well. But there are risks with either strategy.
Risks and rewards
With British American Tobacco, the product that makes up most of its revenues is probably in terminal decline. So the durability of the dividend is questionable.
This doesn’t automatically make the stock a bad choice. But investors need to be confident they’re going to get enough in distributions to offset the business contracting.
Bunzl’s operation is growing, rather than shrinking. But with a 2% dividend yield, the firm needs to find enough growth to be able to generate a return for investors.
The key is finding enough acquisition opportunities. If it can’t it will be hard for the company to maintain the kind of returns it has managed over the last five years.
Total return
Shares with high dividend yields can be attractive for passive income investors. But a growth stock that lets investors take cash out can be just as good.
Ultimately, investment results are the same whether they come directly from the company or by investors selling shares. Either can provide a cash return.
The post Investors who bought shares in this Dividend Aristocrat in 2019 have already got a third of their cash back appeared first on The Motley Fool UK.
Pound coins for sale — 31 pence?
This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!
Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.
What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?
See the full investment case
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Stephen Wright has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. and Bunzl Plc. 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.
