Looking for stocks to generate passive income, I find so many have been hit by rising inflation and interest rates.
But there are some out there that seem to be largely immune to economic conditions. And some are paying big dividends. Imperial Brands (LSE: IMB) looks like one.
The Imperial Brands share price has fallen 35% over the past five years, presumably because investors don’t think the tobacco industry has a long-term future. But I don’t agree. And seeing a 33% share price gain in the past 12 months, I think the markets are re-evaluating the stock.
Dividend yield
Even after the recent gains, forecasts still put the Imperial Brands dividend yield as high as 7%. Those who managed to buy at Imperial’s low point in March could have locked in close to 10%. And they needed to buy significantly fewer shares to generate the same passive income.
On top of the big dividend, Imperial Brands has recently commenced a £500m share buyback. And a share price boost followed. It should be good for future dividend yields too, as the cash will be spread across fewer shares.
First half
In the first half of the current year, Imperial’s reported figures looked weak. But on an underlying basis, the company saw a 2.9% increase in operating profit, with earnings per share up 7.7%. The interim dividend was lifted 1%.
Chief executive Stefan Bomhard made Imperial’s long-term strategy clear, emphasising its focus on the next generation of tobacco products. He told us: “We are now 18 months into our five-year strategy to build a more sustainable Imperial capable of consistent growth“.
We also heard that “In next generation products, consumers have given positive feedback on our recent trials“, and that new roll-outs will follow.
Risks
Together with the firm’s strong cash flow, this supports my confidence in the long-term dividend. But there are risks.
One is that Imperial carries a fair bit of net debt, at £9.8bn. But that was £1.2bn down on the same period last year. And it represents 2.4 times adjusted EBITDA, which doesn’t seem too onerous. It should come down further by the end of the year, but it is still a concern.
The other risk is the uncertainty of the company’s five-year plan. We’re still in its early days, and refocusing plans do go wrong sometimes.
How much?
To buy those 850 shares, and bag that £100 per month in passive income, how much would I have to shell out? It comes to a little over £17,000, which is not exactly small change. And if I didn’t have it, how else could I get there?
If I invested £100 per month in Imperial Brands shares starting now, I’d be able to accumulate almost the exact sum I need in 10 years.
There are a few assumptions there. That the annual total return remains the same at 7% per year, and that I reinvest all dividends in more shares. But it could be a good way of turning surplus cash that I don’t need today into passive income for the future.