Growth stocks have fallen out of favour due to soaring inflation and rising interest rates. I’m on the lookout for inflation-beating dividend stocks to boost my passive income stream. One stock I like the look of is Imperial Brands (LSE:IMB). Here’s why.
Multinational tobacco business
Imperial Brands, previously known as Imperial Tobacco Group, is a multinational tobacco business headquartered in Bristol, England. It is the fourth-largest tobacco company in the world. Some of its best known brands include John Player, Davidoff and Winston.
So what’s happening with the Imperial share price currently? Well, as I write, the shares are trading for 1,634p. At this time last year, the shares were trading for 1,479p, which is a 10% return over a 12-month period.
Many stocks dipped in price when the stock market correction occurred last month. This correction was due to macroeconomic factors as well as the tragic events in Ukraine. Imperial shares dropped from 1,776p on 8 February to 1,486p on 8 March, which is a 16% decline. The shares have rallied 10% since to current levels.
A passive income stock with risks
One of the biggest risks with dividend stocks is that dividends are paid at the discretion of the business and underpinned by a business’s performance. This means they can be cancelled at any time. Many companies cancelled dividends when the 2020 stock market crashed due to the pandemic.
Smoking firms have come under increasing pressure from governments with a renewed focus on the health of the world. The spectre of tightened regulation is a major risk. Any regulation could see the sales, performance, and in turn, investor returns affected negatively.
Finally, the pandemic has shone a renewed light on health-consciousness. This has meant many consumers are seeking tobacco alternatives or even looking to quit smoking totally. This could hamper sales and in turn investor returns later down the line.
Consistent performance and enticing yield
A passive income stock’s dividends are underpinned by consistent positive performance. Well, Imperial Brands has a good track record of performance. I do understand that past performance is not a guarantee of the future, however. Looking back, I can see revenue has increased year on year for the past four years. Gross profit has increased for the past two years.
At current levels, Imperial Brands shares look cheap on paper on a price-to-earnings ratio of just over five. The dividend yield is also enticing and currently stands at over 8.5%. It is worth noting the FTSE 100 average yield is between 3% and 4%. This is over double this amount. The Consumer Price Index (CPI) inflation rate is expected to reach 7.4% in 2022. Imperial’s dividend yield currently beats this!
I would add Imperial Brands shares to my holdings to boost my passive income stream. I do understand the risks involved, especially that dividends can be cancelled at any time.
Imperial shares are currently well priced, offer an enticing dividend yield above inflation levels and the FTSE 100 index average, which help me make my decision.
