How many Imperial Brands shares must I buy to quit work and live off the dividends?

Imperial Brands shares offer a fabulous yield of more than 8% and look cheap too. Have I found the key to a comfortable retirement?

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I don’t buy tobacco stocks, but if I did I would have snapped up Imperial Brands (LSE: IMB) shares ages ago. Like its FTSE 100 rival British American Tobacco, the cigarette maker has been one of the best dividend stocks on the index for as long as I can remember.

While smoking demand is fading in the West, it’s still thriving elsewhere. Imperial Brands is the world’s sixth-largest international cigarette company and sells more than 320bn of them a year in more than 160 countries. Top-selling brands including Davidoff, Gauloises, Winston and Lambert & Butler, along with Golden Virginia fine cut tobacco and Rizla rolling papers.

Smoking is still big business

Like big tobacco generally, it’s also shifting into next generation products (NGPs), such as its e-vapour brand blu. This is a solid business with a huge customer base, whose shares look a steal at today’s valuation of just 6.7 times earnings. That’s just half the 15 times that’s seen as representing fair value for a stock.

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That doesn’t mean the Imperial Brands share price will suddenly more than double, it’s been trading at a low valuation for ages. Yet it dramatically reduces the risk of overpaying if I bought the shares today.

The stock hasn’t done much lately, falling 33.71% over five years and 2.45% over the last 12 months. But the truth is most investors buy it for the dividend. I’d treat share price growth – and there has been plenty over the years – as a bonus.

Created with Highcharts 11.4.3Imperial Brands Plc PriceZoom1M3M6MYTD1Y5Y10YALLwww.fool.co.uk

The big attraction here is the dividend. Imperial Brands shares are forecast to yield a stunning 8.2% in the year ahead. This is not just one of the most generous dividends on the index but looks like one of the safest too, as it’s covered 1.9 times by earnings. So what if I decided to go all in and use it to fund my entire retirement income?

Let’s say I’d like an income of £30,000 a year in retirement, on top of my £10,600 State Pension. Imperial Brands is forecast to pay a dividend of 145p per share in 2023. That means I’d have to buy 20,690 shares. At today’s price of 1,780p per share, I’d need to invest a thumping £368,282. Which would involve selling nearly every SIPP and ISA holding and throwing every penny into this one stock.

I won’t go all in on any stock

Clearly, I wouldn’t do that even if I bought tobacco stocks, because diversification would be a huge issue. My future would rest entirely on one company’s dividend.

Yet I think the company’s prospects are solid. First-half revenues increased by 4.8% to £3.66bn, which looks good even though they fell 1% when adjusted for constant movements. Imperial Brands is increasing market share while net revenue from NGPs grew 19.8% last year, following successful product launches.

Net debt is high at £9.8bn, which is pretty big for a £16.24bn company, especially with interest rates climbing. The dividend remains solid though, with the company finding cash to complete a £1bn share buy back for good measure.

Imperial Brands remains a terrific income stock. I just wouldn’t bet my entire retirement on it. Or any company, for that matter.

But here’s another bargain investment that looks absurdly dirt-cheap:

Like buying £1 for 31p

This seems ridiculous, but we almost never see shares looking this cheap. Yet this Share Advisor pick has a price/book ratio of 0.31. In plain English, this means that investors effectively get in on a business that holds £1 of assets for every 31p they invest!

Of course, this is the stock market where money is always at risk — these valuations can change and there are no guarantees. But some risks are a LOT more interesting than others, and at The Motley Fool we believe this company is amongst them.

What’s more, it currently boasts a stellar dividend yield of around 10%, and right now it’s possible for investors to jump aboard at near-historic lows. Want to get the name for yourself?

See the full investment case

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Harvey Jones has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco P.l.c. and Imperial Brands Plc. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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