Dividend investors looking for high-yield stocks have to carefully balance risk against reward. Reaching too far for yield can leave you owning a struggling business that might someday cut its dividend.

A good example of this today is British American Tobacco (NYSE: BTI). Here's why conservative income investors should pass on the cigarette maker's 8.1% yield and instead go with Realty Income's (NYSE: O) 6% yield.

Roughly 80% of British American Tobacco's revenue comes from its combustibles division; cigarettes account for some 98% of the volume in that division. It is, without a doubt, a cigarette company.

Its cigarette volume declined 6.8% in the first half of 2024 (the European company reports semiannually, so that's the most up-to-date volume data available as of this writing). That's the continuation of a long trend. Volume fell 5.3% in 2023, 5.1% in 2022, 0.1% in 2021 (a year that benefited from pandemic uncertainty), 4.6% in 2020, and 4.7% in 2019.

When the best year for volume in the past five is a 0.1% decline, you know there's a fundamental business problem. This is the main reason the dividend yield is so high.

British American, like its cigarette competitors, has managed to offset the declines with price increases, allowing it to support its lofty dividend. But at some point, it seems likely that rising prices will simply make the volume declines worse. Dividend investors probably won't want to own the company when that tipping point is reached because the dividend could quickly become unsustainable.

Essentially, buying the cigarette maker is a high-risk bet that the company can somehow manage to keep supporting its dividend despite the long-term decline of its most important business. Buying Realty Income, on the other hand, is a bet that the company can continue to expand, and maintain or increase its dividend, just as it has for three decades.

To be fair, Realty Income, a net lease real estate investment trust (REIT), is a very different business than British American Tobacco, but it too offers up a very attractive yield.

As a REIT, Realty Income's business model is designed to pass income on to investors. So that's part of the reason for the high yield.

That said, net leases, which require tenants to pay most property-level operating costs, are something of a spread investment. Interest rate volatility has made the near-term business environment a little more difficult, which further explains the high yield.