Shares are a way I supplement my income. The passive income stream from dividend payments can come in handy. So I include high-yielding income shares in my portfolio.
Here are two I own already and would be willing to buy again today.
Income shares and risk economics
The stocks in question are both tobacco shares. While I hold both, they form part of a wider, more diversified portfolio. I’m comfortable holding more than one company in a sector, even if I think the sector is risky. But that’s only because I diversify my risk by making sure any single sector only forms a small part of my overall portfolio.
Many investors shun tobacco companies for ethical reasons. Others are concerned that declining cigarette consumption and tightening regulation pose an existential threat to the industry. That could throttle revenues and profits and I recognise both risks.
Doubling down
This week, Imperial Brands (LSE: IMB) announced its results and they were well received in the City.
Imperial’s approach to declining cigarette consumption in key markets is basically to double down on its strengths. Its new strategy announced this year envisages investing more to build market share in key countries. The US, UK, Australia, Germany and Spain represent around 72% of its combustible operating profit. By improving its marketing and trade presence in these locations, it hopes to increase its success.
Even with declining volumes, the ability to increase prices on cigarettes means that the company foresees growing profits. That could help support yields on these income shares. But if profits fall, the company might reduce dividends. It did so last year.
Growth signs
In its half-year results, Imperial’s revenues grew 6.1% compared to last year, or 3.5% excluding the impact of exchange rates. Organic adjusted operating profit increased 8.1%.
It’s too early to say whether the new strategy is working. But these results encouraged me.
The shares already yield 8.4% and the company announced a 1% dividend increase. That’s modest, but it does at least signal a return to a progressive dividend policy after last year’s large cut.
UK income shares: BATS
Imperial isn’t just focused on cigarettes, though. It still has ambition in next-generation products such as vaping, although it has sharpened its focus on key brands.
Competitor British American Tobacco (LSE: BATS) seems to be broadening its non-combustible ambitions at speed. New categories revenue grew 15% last year, with vaping consumables growing over 50%. BATS’ non-combustible products are already used by 13.5m consumers.
The company’s mammoth cash flows help support a dividend payout that has been increased annually over two decades. Currently the yield is 7.6%. That’s lower than Imperial’s but still puts the stock among the UK’s most lucrative income shares. It has also been growing its dividend faster than Imperial, with a 2.5% rise this year.
My next move
Doubling down on cigarettes as a cash cow, and developing alternative revenue streams both seem sensible business strategies to me. That is why I’m invested in each of these 7%+ yielding UK shares.
Dividends aren’t guaranteed, and tobacco is only one part of my diversified portfolio. Within that, I would consider buying more shares of each company.
