I have been thinking of ways to boost my passive income streams. As part of that I would like to own more FTSE 100 shares that pay out dividends regularly. Below are two shares I would be happy to own in my portfolio. Both currently pay out dividends each quarter, although that can always change as dividends are never guaranteed.
British American Tobacco
Smoking cigarettes has been declining in popularity for decades. That is a long-term risk for tobacco manufacturers such as British American Tobacco (LSE: BATS).
But while cigarette purchases may be in structural decline, they remain vast. BATS sold more than 300bn cigarettes just in the first half of this year. On top of that, the company has been aggressively expanding its non-cigarette business in an attempt to counter the long-term revenue impact of declining cigarette sales.
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British American Tobacco is able to use its pricing power to try and offset the impact of declining volumes. Nicotine is addictive. So BATS can increase the cost of its products while hopefully retaining most customers. That translates into a high volume and hugely profitable business. In the first half, for example, the FTSE 100 company reported £12.9bn in revenues and £3.7bn in profit from operations.
Risk and reward
I am concerned by the company’s balance sheet, which showed adjusted net debt of £39.9bn at the end of the first half. Repaying or refinancing that debt in an environment of rising interest rates could hurt British American Tobacco’s ability to pay its dividend at the current level. For now, though, it pays a quarterly dividend and the yield stands at 6.5%.
British American Tobacco shares already have a leading position in my portfolio. To ensure I stay diversified I do not plan to buy any more at the moment. But I plan to keep holding the ones I own.
Unilever
Another FTSE 100 company that benefits from selling consumer goods to huge numbers of people worldwide is Dove-to-Marmite maker Unilever (LSE: ULVR).
The basic economics of the business are attractive. Unilever’s huge volumes mean it enjoys economies of scale, while its portfolio of premium brands allows it to make attractive profit margins.
Last year, post-tax profits at the company came in at €6.6bn. High inflation is a risk to profitability in the coming years. Although brand loyalty means the company can raise prices and hopefully not see a big sales drop, there is a limit to how far it can push such price rises before sales volumes start to suffer. Meanwhile, input costs have been soaring.
As a long-term buy and hold investor, however, I think Unilever’s business model could continue to work well for decades. It pays a quarterly dividend and currently yields 3.6%. If I had spare cash to invest today, I would buy Unilever shares for my portfolio.
