I suspect it would be hard for dividend investors not to salivate at the potential these stocks offer. British American tobacco‘s (NYSE: BTI) 9.5% dividend yield. But dividend investors also know that such high yields typically come with material risks, which is precisely the case here.
If you’re looking for a reliable dividend stock with a high (though not that high) yield, you might want to change course and Real estate income (NYSE: O) and its yield of about 6%. Here’s why.
I don’t like British American Tobacco’s business
British American Tobacco has a huge dividend yield, and it’s a dividend that’s likely to hold up in the short term. But I invest in stocks with the idea that I’ll own them for decades. With that mindset, I prefer to buy companies that I think have long-term growth potential. British American Tobacco doesn’t have that right now.
The company’s core product is cigarettes. Cigarette smoking has been out of favor for years, causing the company’s cigarette volume to decline by about 21% over the past five years. It should worry any long-term investor that a consumer staples company has seen such a decline in its core industry.
Management is building new business segments to compensate, but at this point the only way to address the declining cigarette business is to raise prices. That is not a long-term solution and only the most aggressive investors should consider British American Tobacco until the company’s transition away from cigarettes begins to gain traction.
Boring Realty Income is a better dividend stock
A better option for dividend investors would be Realty Income, the largest net lease real estate investment trust (REIT). Net leases require tenants to pay most of the operating costs at the property level. The REIT offers a very attractive dividend yield of nearly 6%, supported by a dividend that has increased dramatically for 30 years. What you lose in yield relative to British American Tobacco, you make up for in the quality of the underlying business.
For example, Realty Income, with a market cap of $45 billion, is more than three times the size of its nearest competitor. The REIT’s balance sheet is rated investment grade, and it has a portfolio spanning North America and, increasingly, Europe.
There are a couple of positives here. First, Realty Income’s size and financial strength give it privileged access to the capital markets. So it can afford to bid aggressively on acquisitions and still turn a profit. Second, its size allows it to do deals that smaller competitors might not even consider. That includes simply buying other REITs as Realty Income consolidates the sector. Third, Realty Income’s exposure to Europe helps it develop a large market that is just beginning to adopt the net lease model. So it has multiple levers for growth relative to domestically focused competitors.
But the real lesson from the Realty Income vs. British American Tobacco comparison is that the REIT is building from a position of strength. The cigarette company is simply trying to find a new business to get into, bleeding its cash cow dry for the cash it needs to support its oversized dividend and capital investment needs. If you’re hoping to live off your dividends for decades, Realty Income should be an easy winner in this matchup.
Reduce risk: a 6% return is still pretty good
The S&P 500 index offers a paltry 1.3% dividend yield. You can earn returns by taking huge risks with an investment like British American Tobacco. If you do, you’ll have to keep a close eye on the company’s declining cigarette business and pray that it can find a way to offset its continued decline. Or you could just buy a good company with a growing business like Realty Income, which still has a generous, but fully sustainable, 6% yield. The risk/reward ratio makes Realty Income the easy choice for me.
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Ruben Gregg Brouwer has positions in Realty Income. The Motley Fool has positions in and recommends Realty Income. The Motley Fool recommends British American Tobacco Plc and recommends the following options: long January 2026 $40 calls on British American Tobacco and short January 2026 $40 puts on British American Tobacco. The Motley Fool has a Disclosure Policy.
I Wouldn’t Touch This Stock With a 10-Foot Pole — This Is the High-Yield Stock I’d Buy Instead was originally published by The Motley Fool
