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The income potential of buying the right shares can be significant over the long term. At the moment, some well-known FTSE 100 income shares have yields that I find very attractive.
Here are two that each yield 8% or more. I already own them but, if I had spare cash and was able to keep my portfolio sufficiently diversified, I would be happy to buy more of each in today’s market.
British American Tobacco
With cigarette use in structural decline in many markets, what might be the appeal of British American Tobacco (LSE: BATS)?
The first one is the cigarette business itself. Demand may be falling in many markets, but it remains robust. Last year, British American sold over 600bn cigarettes worldwide.
The economics of the business are excellent. The product is cheap to make but premium branding and nicotine’s addictiveness give manufacturers pricing power. That helps generate massive free cash flows, which in turn enable a generous dividend. At the moment, these income shares yield 8.8%.
But I also think non-cigarette products could grow strongly in popularity in coming years. British American has been expanding its portfolio of such alternative products aggressively. That could contribute to future profits, independently of the demand picture for cigarettes.
In fact, I reckon that what has made British American so successful in the cigarette business could help it benefit enormously from the rising popularity of vaping. It has a huge distribution network, premium brands and the sort of credibility for manufacturing quality that goes with being one of the big boys.
By growing its non-cigarette business, I think the firm is setting the stage for the next chapter in a history that has seen it raise its dividend annually for decades.
Income shares that have a clear dividend policy can make it easier to know what I can hopefully expect in future by way of dividends.
Dividends are never guaranteed, so such a policy is essentially just a statement of intent. However, if a business does well then I would typically expect it to deliver on its stated policy, or risk losing credibility with investors.
Asset manager M&G (LSE: MNG) has a dividend policy of paying the same amount or higher in dividends per share each year. Last year, for example, saw a 6% increase in the payout.
If the increases keep coming, that would be great. But even if M&G only manages to hold its payout stable, that would still be lucrative. This income share already yields an eye-watering 10.3%.
Can that continue?
I do see risks. For example, choppy markets could lead clients to pull out funds, leading to lower sales commissions and profits for asset managers such as M&G.
But I think the company has significant strengths, from an existing customer base to a strong reputation that can help it attract new business.
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