Among FTSE income shares, few look as solid to me as Imperial Brands (LSE: IMB).
Its earnings remain remarkably steady for such a mature business, supported by disciplined cost control and resilient demand.
That combination continues to generate the huge cash flow that underpins its generous dividend.
So, what sort of annual returns are we looking at over time from this?
How large could the dividends grow?
Over the past five years alone, Imperial Brands has paid respective dividends for 2021 of 139.08p, then 141,17p, followed by 146.82p, 153.42p, and 160.32p. These have generated average yields in those years of 8.9%, 7.6%, 8.8%, 7.1% and 5.1%. The variable yield, despite rising dividends, illustrates that returns change in line with share prices — up and down.
The current dividend yield stands at 5.7%, well above the present FTSE 100 average of 3.1%.
However, analysts forecast the stock’s return will increase to 6.1% this year, 6.5% next year, and 6.8% in 2028.
What does that mean in cash terms?
Another £20,000 investment from me would make £19,402 in dividends after 10 years and £132,929 after 30 years. The figures are based on the forecast 6.8% as an average and on the dividends being reinvested into the stock.
This allows the full turbocharging effect of ‘dividend compounding’ to kick in. It is a similar idea to leaving interest to accrue in a savings account. And over 30 years — the standard investment cycle for long-term investors — the results can be extraordinary.
In this case, after 30 years, the total value of the holding (including the £20,000 initial stake) would be £152,929. And this would pay a yearly income of £10,399!
How strong is the underlying business?
To maintain a rising dividend trend, a company needs to keep its profits increasing over time.
A risk to Imperial Brands here is any tougher regulatory action in key markets that could limit pricing power. Another is any long‑term decline in nicotine product volumes across developed markets to add to the fall in cigarette volumes.
Nevertheless, analysts expect Imperial Brands’ profits to increase by a steady 4% a year to end-2028 at minimum.
This looks well supported to me by the company’s current guidance for 3%–5% adjusted operating profit growth this year. It reflects the firm’s five-year strategy to expand its smoking alternatives business while maintaining its traditional tobacco operation.
My investment view
Taken together, these factors paint a picture to me of a business with both the stability and pricing power needed to sustain long‑term dividend growth.
There are risks, of course, as in all businesses, but they look well understood and largely reflected in today’s valuation.
With earnings expected to rise steadily and cash generation remaining strong, the dividend outlook appears well supported.
And for income‑focused investors, that combination of visibility and value is hard to ignore. It leaves Imperial Brands looking like a dependable passive‑income option to consider for the years ahead.
I will be buying more of the stock very shortly. And I am also looking at other high-yield stocks that appear bargains at current pricing.
Simon Watkins has positions in Imperial Brands Plc. The Twelfth Magpie 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 and Hidden Winners. Here at The Twelfth Magpie we believe that considering a diverse range of insights makes us better investors.
