British American Tobacco (LSE: BATS) shares have done really well over the past year, rising around 32%. That’s not including the high-yield passive income on top.

The combination of share price appreciation and dividends has made this a great stock to own since I bought it 12 months ago.

Here, I’ll consider whether I should buy more shares for my portfolio, and how many I might need to generate £1.5k a year in dividends.

Passive income potential

When I bought this FTSE 100 share, the forward-looking dividend yield was an eye-popping 9.9%. It’s currently lower due to the higher share price, but it still comes in at 7.7% for this year and around 8% for 2026.

Of course, these are just forecasts and no payout is set in stone. But the tobacco firm generates plenty of surplus cash, and I’m encouraged that these prospective payouts are covered around 1.5 times by forecast earnings.

Put another way, British American pays out roughly two-thirds of its earnings as dividends. Personally, I’d be very surprised if the payout was cut in the near term.

Assuming the £2.52 dividend per share is met, this means I’d need to own roughly 595 shares to aim for £1,500 in passive income next year. I’m using 2026’s forecast figure because I don’t own that many shares yet, and there are other things beyond yield for me to consider here.

Falling volumes

The forward-looking price-to-earnings ratio is around 8.8, which means the stock still appears cheap. But on a price-to-sales basis, the stock looks more pricey at 2.7.

Either way, many would argue that a low valuation is warranted. After all, the company still generates around 80% of its revenue from cigarettes brands such as Dunhill, Lucky Strike, and Rothmans. And cigarette volumes fell by around 5% in 2022, 2023 and 2024. They’re projected to keep falling too.

British American is offsetting these volume declines with price increases, which supports the lofty dividend yield for now. But at some point its smokeless products like vapes, heated tobacco and nicotine pouches will have to start taking up some of the slack.

The company’s vision is one where smokers have migrated from cigarettes to smokeless alternatives. It aims for at least 50% of revenue from these next-generation products by 2035, up from 17.5% last year.

However, we don’t know whether they will prove anywhere near as profitable as cigarettes, especially as they have much lower production and distribution barriers. This means there’s a lot more competition. 

If these smokeless products don’t prove to have much pricing power, I suspect there might be some backsliding on targets. We’ve seen this dynamic play out recently with BP, which is reducing investments in renewable energy and increasing focus on oil and gas production. In other words, its bread and butter.

Should I buy more shares?

Upon reflection, I’m happy with the size of my holding in this stock for now. If it sells off, I may reconsider.

The next quarterly payment of 60p per share is due on 7 May. What I will do is reinvest that cash into other dividend stocks in my portfolio, probably Legal & General or Aviva.