FTSE 100 tobacco and nicotine merchandise producer British American Tobacco (LSE: BATS) is a cornerstone of my passive revenue investments.

These have been made with the only real intention of creating me huge revenue with little each day effort on my half.

This, in reality, is the center of the passive revenue funding concept. And as Warren Buffett put it: “When you don’t discover a technique to earn a living when you sleep, you’ll work till you die.”

How a lot will be made?

The corporate raised its dividend in 2023 by 6% from 2022 — to 230.89p a share. On the present £23.30 share worth, this yields 9.9% — one of many highest within the FTSE 100.

So, 858 shares within the firm would price me round £20,000, so within the first 12 months I might make £1,980 in dividends.

Nonetheless, if I reinvested the dividends, reasonably than taking them out of my portfolio, I might make much more.

This is named ‘dividend compounding’ and is identical precept as compound curiosity in financial institution accounts. However reasonably than curiosity being reinvested, dividend funds are.

So, if I reinvested the dividends and the yield averaged the identical, I’d have £53,607 after 10 years. This might pay me £5,033 a 12 months, or £419 a month.

On the identical proviso, after 30 years I’d have £385,117, paying me £36,158 a month, or £3,013 each month in passive revenue!

Inflation would scale back the shopping for energy of my cash, after all. However it exhibits that smaller investments in the correct shares could make a lot larger returns over time if the dividends are reinvested.

Is a excessive yield sustainable?

The extent of dividends paid by a agency relies on its earnings and income over time. If these decline, then the possibilities are that the dividends will drop as properly.

Nonetheless, British American Tobacco appears to be like in good well being to me because it transitions from tobacco merchandise to nicotine replacements.

Its adjusted revenue from operations in 2023 rose 3.1% from 2022 to succeed in £12.47bn. Adjusted diluted earnings per share (EPS) elevated 4% over the identical interval to 375.6p. And adjusted internet debt fell 7.4% to £33.94bn.

One threat right here is that its transition away from conventional merchandise is delayed for some motive. One other is any litigation from the results of its merchandise previously.

Nonetheless, the shares already look to be buying and selling at a considerable low cost towards their friends. This could hopefully scale back the danger of an additional main fall within the inventory worth wiping out my dividend positive factors.

Particularly, the corporate trades on the important thing price-to-earnings (P/E) inventory valuation measurement at simply 6, towards a peer group common of 12. This appears to be like very low cost to me.

A discounted money circulation evaluation exhibits the inventory to be round 52% undervalued at present worth of £23.30. Subsequently, a good worth can be round £48.54.

The shares could not essentially ever attain that time, however it underlines to me that they appear superb worth.

I purchased a bit of the inventory at a decrease degree than its present worth, so am proud of that place.

If I didn’t have it, I’d completely purchase it now for the excessive yield supported by an undervalued share worth and a powerful enterprise outlook.