If I put £10,150 into this dividend stock, it could pay me a £1,000 yearly second income

The Troat Inn on River Cherwell in Oxford. England

Regularly putting money into dividend stocks is a proven way to build up an attractive second income over time.

One ultra-high-yield dividend stock that keeps catching my eye is British American Tobacco (LSE: BATS). The FTSE 100 share’s yield is almost 10%!

But I’m torn because this is a tobacco stock, which I’ve tended to stay away from due to regulatory issues and a decline in smokers.

Should I invest? Let’s explore.

Dividend Aristocrat

As mentioned, I’m incredibly tempted by the massive income on offer here.

The firm is forecast to pay out a dividend of 238p per share for 2024. At today’s share price, this equates to a forward yield of just over 9.8%.

In practice, that would mean I could bag £500 a year in passive income from an outlay of just £5,075. Or £1,000 annually from £10,150.

While no dividend is certain, I’m encouraged that the prospective payout is covered 1.54 times by forecast earnings. And cash flows are rarely a problem. So I’d be surprised if the yield isn’t met.

Plus, as a blue-blooded Dividend Aristocrat, the firm boasts an incredible track record. In fact, it’s increased its annual payout every year for almost a quarter of a century.

Attractive business model

Behind every Dividend Aristocrat lies a solid business model, and Big Tobacco is no different.

As Warren Buffett once said about the economics of cigarettes: “It costs a penny to make. Sell it for a dollar. It’s addictive. And there’s fantastic brand loyalty.”

This is evident in British American Tobacco’s 82% median gross margin over the last decade. Smoking may be in overall decline, but the economics of the business remain fantastic.

Furthermore, there is limited competition. I mean, the millions of ambitious graduates coming out of business schools every year probably aren’t dreaming of disrupting the tobacco industry.

Even if they managed to find funding, how would these upstarts gain market share when advertising is banned or restricted?

A smokeless world

The company’s vision is to “Build a Smokeless World“. At first glance, this may seem strange. A bit like McDonald’s committing to a world without beef burgers.

Then again, smoking remains the leading cause of premature death, so it’s arguably a necessary stance.

British American Tobacco’s New Categories (NC) division houses smokeless products like vapes and oral tobacco. The jewel in the crown here is the Vuse vape brand, which drives around half of NC revenue.

Encouragingly, this unit has turned profitable ahead of schedule, which bodes well for the future.

That said, vaping is coming under increasing regulatory scrutiny and it is uncertain whether it will ever be as profitable as cigarettes. The challenges are clear.

My move

I recently read an article on this stock from nearly 20 years ago. The risks were exactly the same as today (increasing regulation and less smokers leading to falling profits).

Yet a £10,000 investment back then would have returned more than double that just in dividends. And the share price has more than doubled.

We may not get a repeat of that, but I’m very tempted by the near-10% yield.

Should you invest £1,000 in British American Tobacco right now?

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Ben McPoland has positions in McDonald’s. The Motley Fool UK has recommended British American Tobacco P.l.c. 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.