I can buy 18 shares a month in this FTSE 100 stock for £1,000 a year in income

The UK stock market has an abundance of high yielding quality equity shares. In fact, when I’m looking to improve my passive income, I often have a hard time choosing.

Right now, though, I’m thinking this FTSE 100 sharing stands out from the crowd.

The stock of sin

I refer to British American cigars (LSE: BATS). The company has a range of cigarettes Lucky Strike again Pall Malland smokeless products like Wake up (breathing), Velo (nicotine pouches), and Glo (hot tobacco).

The stock is up 16.6% year to date but is basically at a five-year low.

Now, I get that tobacco companies are not for everyone, especially because they sell dangerous and addictive products. As Mark Twain famously said: “Quitting smoking is the easiest thing in the world. I know because I’ve done it thousands of times.”

In the past, the recession-proof income from tobacco was attractive to investors. However, today many feel uncomfortable investing in so-called sinful stocks (tobacco, alcohol, gambling, etc.). Others also won’t invest in oil or miners, while monopolistic ‘Big Pharma’ and ‘Big Tech’ sometimes get a bad rap.

At the extreme, there would be nothing to invest in!

Bargain-basement valuation

Anyway, I’m going out. Overall tobacco sales have been declining in Western countries and vaping is facing increasing regulatory scrutiny. Both are a threat to British American Tobacco’s earnings.

However, the company remains highly profitable and sports a high dividend yield of 8.8%. The payout is not guaranteed, of course, and I would normally be suspicious of such a high yield.

But over the next five years, the company expects to generate around £40bn of free cash flow before dividends. And right now, the stock’s price-to-free-cash-flow ratio is about 7. That’s incredibly cheap!

£1,000 a year

As I write, one share is 2,677p (or £26.77). With a yield of 8.8%, that means I would need 421 shares to generate £1,000 a year in income. That would cost me over £11,270.

But what if I can’t afford that? Well, I can use a pound-to-pound strategy where I build my grip over time.

For example, buying 18 shares a month would cost me around £482 (as things stand). And if I do this consistently every month for two years, I will have 432 shares. I hope they will pay me £1,028 in dividends each year.

Of course, the share price will fluctuate during this period and the company may increase or decrease the dividend next year. Also, I would like to build a diversified portfolio to avoid putting all my eggs in one basket.

I want more

The company’s strong competitive position and cash flow make me optimistic that profitability will be sustainable for the foreseeable future.

In addition, the tobacco giant owns about 25%. ITCthe fastest growing Indian conglomerate whose shares have risen 100% in five years. This stake is worth £15bn! Not a bad item to have in your back pocket.

This is why British American Tobacco is in my high-yield portfolio, and why I plan to buy more shares soon. Every time a stock pays me a dividend, I plan to reinvest and aim for higher future income.