Forget Buying a Rental Property: Passive Investors Should Buy This Spectacular Dividend Stock Yielding Close to 10% Instead

The Motley Fool recommends British American Tobacco P.l.c. and also recommends the following options: long January 2026 $40 calls on British American Tobacco and short January 2026 $40 puts on British American Tobacco. However, it's important to note that the Motley Fool's stance on investing in British American Tobacco may not necessarily mean it's the best stock to buy right now, as their recommendations can change over time.

Investing in British American Tobacco (BTI) comes with potential risks due to the declining trend in cigarette smoking. The main risks can be summarized as follows:

1. Declining cigarette volumes: As cigarette smoking declines, British American Tobacco's core business is negatively impacted. The company has experienced a significant volume decline in combustible products in recent years, which could worsen in the future. Although the company has managed to offset this revenue hit by raising prices, there's a limit to how much this strategy can be sustained.

2. Increased competition in the non-combustible market: As tobacco companies diversify into non-combustible products such as vapor pods, heating sticks, and oral pouches, competition in this market segment is intensifying. Although British American Tobacco is shifting its focus to these new categories, it is trailing behind its rival Philip Morris International, which has a more advanced smoke-free product portfolio.

3. Potential regulatory risks: The tobacco industry is heavily regulated, and further restrictions on cigarette sales and marketing could negatively impact British American Tobacco's business. Additionally, the company's non-combustible products may also face regulatory challenges, which could hinder their growth prospects6.

4. High dividend yield risk: While British American Tobacco's dividend yield of around 10% may be attractive to income-oriented investors, the high yield could also be a sign of increased risk3. If the company's financial performance deteriorates, it may be forced to cut its dividend, which would negatively impact investors relying on that income stream.

5. Leverage and financial risk: British American Tobacco has a higher debt-to-EBITDA ratio compared to some of its peers, which could make it more vulnerable to financial stress in times of adversity. Investors should closely monitor the company's balance sheet and debt situation.

In summary, while British American Tobacco is taking steps to diversify its operations and adapt to the decline in cigarette smoking, investors should be aware of these potential risks and closely monitor the company's performance and industry developments.