382 shares in this FTSE dividend gem could make investors £2,849 a year in passive income!

This FTSE high-yield heavyweight stock can generate significant passive income over time and looks extremely undervalued against its peers.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

Passive and Active: text from letters of the wooden alphabet on a green chalk board

Image source: Getty Images

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

The FTSE 100’s Imperial Brands (LSE: IMB) remains one of my key passive income holdings.

Passive income is money made with minimal effort, as with stock dividends. And in 2024, the stock paid 153.42p a share, yielding 5.3% on the current £28.76 price.

Analysts forecast that the dividends will increase to 164p in 2025, 171.4p in 2026, and 176.2p in 2027. This will give respective yields based on present share price of 5.7%, 6%, and 6.1%.

Passive income stocks: our picks

Do you like the idea of dividend income?

The prospect of investing in a company just once, then sitting back and watching as it potentially pays a dividend out over and over?

If you’re excited by the thought of regular passive income payments, as well as the potential for significant growth on your initial investment…

Then we think you’ll want to see this report inside Motley Fool Share Advisor — ‘5 Essential Stocks For Passive Income Seekers’.

What’s more, today we’re giving away one of these stock picks, absolutely free!

Get your free passive income stock pick

How much can be made?

£11,000 is the average amount of savings in the UK, which would buy 382 shares in Imperial Brands.

So, investors considering such a holding would make £583 in dividends this year based on the 5.3% yield.

Over 10 years on the same basis – ignoring projected rises in return – this would increase to £5,830. And after 30 years on the same average yield, this would rise to £17,490.

This is a lot more than would be made from a standard UK savings account.

Supercharging the returns through compounding

As good as these returns are, they could be vastly greater using the standard investment technique of ‘dividend compounding’.

This is similar to leaving interest in a savings account to gradually accrue over time. However, the effects of doing this with stock dividends can be extraordinary.

In Imperial Brands’ case, using this method on the same average 5.3% yield would generate £7,666 in dividends after 10 years, not £5,830.

After 30 years on the same basis, this would rise to £42,753 rather than £17,490.

Adding in the initial £11,000 investment, the holding would be worth £53,753. On the same 5.3% yield, this would pay £2,849 a year in passive income!

A potential share price bonus

When I bought Imperial Brands shares, they yielded much more than now. This is because a stock’s yield moves in opposite directions to its price. And this stock has risen 73% from its 5 March 12-month traded low of £16.62.

I think much of this has been down to ongoing share buybacks, which tend to support price gains. The firm has also posted some solid results over the past year.

Its 2024 numbers showed a 4.5% year-on-year rise in reported operating profit — to £3.55bn. Earnings per share jumped 19.1% to 300.7p.

That said, a stock can still have a lot of value in it despite such a price rise.

To find out if this is true with Imperial Brands, I ran a discounted cash flow analysis. Using other analysts’ future cashflow forecasts and my own, this shows the stock is 60% undervalued at £28.76.

Therefore, its fair value is technically £71.90, although market unpredictability might push it lower or higher.

Created with Highcharts 11.4.3Imperial Brands Plc PriceZoom1M3M6MYTD1Y5Y10YALL12 Feb 202012 Feb 2025Zoom ▾Jul '20Jan '21Jul '21Jan '22Jul '22Jan '23Jul '23Jan '24Jul '24Jan '252021202120222022202320232024202420252…20252…www.fool.co.uk

Will I buy more of the stock?

A risk to the stock is cut-throat competition in the tobacco and nicotine replacements sector, which could squeeze its margins.

Nonetheless, the firm expects single-digit net revenue growth and mid-single-digit adjusted operating profit growth in 2025.

Additionally positive is the withdrawal of the US Food and Drug Administration’s planned ban on menthol cigarettes. These products comprise around 15% of Imperial Brands’ profits in the US. 

Given their solid financial forecasts, strong yield and extreme undervaluation, I will be buying more of the stock very soon.

Our analysis has uncovered an incredible value play!

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.

Simon Watkins has positions in Imperial Brands Plc. The Motley Fool UK has recommended 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.

More on Investing Articles

Tree lined "tunnel" in the English countryside of West Sussex in autumn
Investing Articles

How should I invest to build retirement wealth in a SIPP for a child?

Ben McPoland explains how he plans to adapt his investing strategy in order to more reliably build wealth for his…

Read more »

Content white businesswoman being congratulated by colleagues at her retirement party
Investing Articles

Age 60 and looking for income? 3 FTSE 100 shares yielding 6%+ to consider

Harvey Jones picks out three FTSE 100 shares that offer a juicy passive income stream. Older investors should consider them,…

Read more »

UK money in a Jar on a background
Investing Articles

One of Britain’s best dividend shares is soaring! Time to buy?

Our writer's been looking for shares to buy. One of the biggest UK dividend payers has caught his eye. Could…

Read more »

Thoughtful man using his phone while riding on a train and looking through the window
Investing Articles

£100, £1,000, or £100,000? Here’s how much it takes to start investing in shares!

Does it take a large sum of money for someone to start investing in the stock market? Our writer doesn't…

Read more »

Close-up of a woman holding modern polymer ten, twenty and fifty pound notes.
Investing Articles

£20,000 in an ISA? Here’s how it could target £1,250 a month in passive income

A Stocks and Shares ISA can be a platform for someone with spare cash to set up a sizeable second…

Read more »

Close-up as a woman counts out modern British banknotes.
Investing Articles

3 UK shares I own for easy passive income

Christopher Ruane runs through a diverse trio of UK shares he currently owns, each of which generates passive income in…

Read more »

UK coloured flags waving above large crowd on a stadium sport match.
Investing Articles

Is the UK-US trade deal a brilliant buying opportunity for FTSE 100 shares?

A long-awaited trade deal has been struck between the UK and the US, but how much will FTSE 100 stocks…

Read more »

UK supporters with flag
Investing Articles

3 growth stocks up 27% in a month to consider buying now

Stock market volatility has been a brilliant opportunity to buy growth stocks, which are now rebounding at speed. Harvey Jones…

Read more »