There are hundreds of epic dividend stocks on the London Stock Exchange. And perhaps two of the most notorious passive income generators are the FTSE 100‘s tobacco giants.

Tobacco stocks are not everyone’s cup of tea and are often excluded from ESG funds due to the harmful nature of their products. But that doesn’t mean it isn’t a highly cash-generative sector. And this lack of widespread popularity has resulted in both British American Tobacco (LSE:BATS) and Imperial Brands (LSE:IMB) historically paying pretty chunky yields.

Even today, after enjoying an impressive rally over the last few years, both income stocks still offer payouts in excess of 5.5%. But is one company ultimately better than the other?

Funding the future

In 2026, both companies are following essentially the same playbook. Traditional cigarettes generate enormous cash flows, but regulators are steadily clamping down on these products. And both management teams know it.

The solution? Diversify the product portfolio to become less reliant on these legacy products, and more reliant on less-harmful alternatives such as vapes, heated tobacco, and oral nicotine pouches. These too still have their regulatory challenges. But as global smoking volumes continue to decline, this evolution isn’t optional.

So how’s this transformation going?

British American versus Imperial Brands

Overall, British American Tobacco seems to be further ahead. During the first half of 2026, revenues from its New Category products jumped 18%, paired with an impressive 55% surge in the segment’s contributions to profits. And following its recent Capital Markets Day, leadership expects further double-digit growth in the mid-teens between now and 2030.

What about Imperial Brands? Here, the rival tobacco giant’s also gaining ground. Its blu vape products continue to perform well, while Pulze 3.0 and new iD sticks are driving heated-tobacco momentum. And following its recent acquisition of Black Buffalo and Helwit, the group’s oral nicotine portfolio has just been expanded.

In terms of financials, the business is currently on track to deliver similar double-digit revenue growth for its Next Generation Products in its 2026 fiscal year (ending in September). However, beyond this, long-term targets are a bit more vague, making its transition harder to assess.

Nevertheless, just like British American Tobacco, its traditional tobacco business remains in solid shape, with steady single-digit net revenue growth expected for the sixth consecutive year. And with a projected 3%-5% boost in operating profits, leadership’s planning on using its excessive free cash flow generation to continue buying back its own shares.

Which is the better investment to consider?

British American Tobacco and Imperial Brands both are surrounded by enormous execution risk. Transitioning an entire business from one product type to another is no easy feat. And with the ever-stricter regulatory environment also applying pressure, success is by no means guaranteed.

However, that doesn’t change the fact that, so far, both businesses are seemingly taking the right steps while still generating enough cash flows to comfortably cover their high dividend yields.

As previously mentioned, I believe British American Tobacco’s currently ahead in the race. And with a clear strategic pathway mapped out, investors thinking about investing in this space may want to take a closer look at this enterprise first. And it’s not the only dividend stock that’s caught my eye this week…

What income stock do we like better than British American Tobacco P.l.c. right now?

One of our Share Advisor analysts has just released a brand new stock report that we think is a must-read for any investor looking to try and generate potential income.

And the best bit is that you can see if for yourself, right now, absolutely free of charge!

No jargon. No hard sell. Just a clear look at an income share we think is worth your time.

Zaven Boyrazian does not hold any positions in the companies mentioned.