When I select stocks for my passive income portfolio, it’s not simply a case of looking at a company’s dividend yield in isolation — although that’s certainly important. I investigate beyond the headline number to see if the business has a reliable track record of dividend growth and rewarding shareholders with payouts during economic downturns.
In addition, I like to diversify my stock market holdings across different sectors. In doing so, I’m limiting my risk of being overly exposed to any single company or industry. Hopefully this means I can rely on passive income streams from at least some of my positions should any individual firm cut or suspend its dividend if it encounters difficulties.
With that in mind, let’s explore two FTSE 100 dividend stocks I own.
British American Tobacco
The British American Tobacco (LSE:BATS) share price has slumped 12% over the past year. The fall has pushed the stock’s dividend yield up to 7.84%, which is significantly higher than the Footsie average.
There are risks associated with investing in tobacco companies, of course. Governments are imposing ever-increasing taxes on combustible products and the regulatory threats to their business models are considerable. That said, the recent sell-off in British American Tobacco shares looks unjustified, in my view.
Although the company’s cigarette value share flatlined in 2022, efforts are under way to diversify the business. Annual revenue growth of 37% in new category products, such as vapour and oral nicotine, is encouraging. The business expects the new category division will become profitable in 2024 — one year ahead of target.
In addition, the firm has stakes in 13 cannabis companies. That’s more than any other tobacco giant. Germany has plans to legalise recreational use next year, following similar moves in Canada and the US. This is a rapidly expanding market, offering British American Tobacco growth opportunities beyond traditional tobacco sales.
With a relatively low price-to-earnings ratio of 9.73 and a bumper dividend, I hope to count on my British American Tobacco shares for a big passive income stream in the coming years.
Tesco
The Tesco (LSE:TSCO) share price is down 6% over 12 months, but the supermarket stock has enjoyed strong upward momentum since October. Currently, the company offers a 4.36% dividend yield.
Britain’s largest groceries business also faces challenges. Food inflation has put pressure on Tesco’s margins and competition in the sector is hotter than ever due to an ongoing price war between established supermarkets and German discount chains Lidl and Aldi.
Nonetheless, Tesco claims a substantial market share of 27.5%. What’s more, in recent financial results the supermarket maintained its FY 22/23 guidance of £2.4bn to £2.5bn in retail operating profit and retail free cash flow of at least £1.8bn.
Tesco’s focus on improving customer service is another positive feature. The company has expanded its same-day delivery service Whoosh to 1,000 Express stores, exceeding its original target by 200. It’s also building on a partnership with UberEats. Ambitions to secure a market-leading position in service quality are encouraging in a sector where convenience is increasingly important for consumers.
Although not without risks, Tesco’s growth prospects look promising to me. This is another stock that will occupy an important place in my passive income portfolio for 2023 and beyond.
The post 2 stocks paying me passive income in 2023 appeared first on The Motley Fool UK.
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Charlie Carman has positions in British American Tobacco P.l.c and Tesco Plc. The Motley Fool UK has recommended British American Tobacco P.l.c. and Tesco 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.