An important component of my investment strategy is to build my passive income stream through dividend paying stocks. One income stock I really like the look of is Imperial Brands (LSE:IMB). Here’s why.
Smokers corner
Imperial is one of the largest tobacco businesses in the world. Previously known as Imperial Tobacco, some of its best known brands include Davidoff, John Player, and Winston.
So what’s happening with Imperial shares currently? Well, as I write, they’re trading for 1,883p. At this time last year, the stock was trading for 1,713p, which equates to a 10% return over a 12-month period. The shares are up 30% since the stock market correction in March. Many other UK shares have struggled to bounce back since the dip. Some have even continued to fall further due to macroeconomic headwinds.
An income stock with risks
Despite my bullish attitude towards Imperial, I must note risks associated with buying the shares. Firstly, due to the ill-effects of smoking on health, regulation is tight around tobacco products. Furthermore, this regulation could be tightened at any time, which could affect Imperial’s performance and levels of returns.
Next, the pandemic raised health-consciousness around the world. Many people are seeking alternatives to tobacco products or looking to quit altogether. This could hurt Imperial’s performance and returns too if demand were to fall.
Finally, as with any income stock, dividends are never guaranteed and can be cancelled at the discretion of the business. This typically occurs when a business needs to conserve cash.
Why I like Imperial shares for passive income
So to the positives then. Despite Imperial shares being on a positive trajectory in recent months, they still look dirt-cheap to me. They’re on a price-to-earnings ratio of just eight. It is worth mentioning that the FTSE 100 average ratio is around 15, making Imperial shares look good value for money.
Next, for any stock to provide stable and lucrative returns, performance must be consistent. I do understand that past performance is not a guarantee of the future, however. Looking back, I can see Imperial has grown revenue year on year for the past four years. It has also recorded consistent profit levels for the past four years too.
Finally, for any income stock, the dividend yield on offer is important. At current levels, Imperial shares yield close to 8%. To provide further context, the FTSE 100 average yield is 3%-4%, making Imperial’s yield nearly double the index average.
According to the World Health Organisation, close to a quarter of the world’s population smoke or use tobacco-based products. The majority of these sales originate from emerging and developing economies and demand here is highest. I can’t see demand levels dropping any time soon which is good news for an investor like me who likes Imperial as a top income stock.
To summarise, I think Imperial shares could definitely boost my passive income stream. For that reason I would buy the shares.
