A SIPP is an attractive but often overlooked way to build a second income for later life. A Self-Invested Personal Pension offers generous upfront tax relief on contributions, something you don’t get from a Stocks and Shares ISA. It allows investors to invest in FTSE 100 shares and other equities, to generate share price growth and dividend income. So how much would you need in a SIPP to earn £667 a month in passive income?
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
How big should my pension be?
That works out at £8,004 a year. It won’t be enough to live on in retirement, but combined with the State Pension, ISA investments and other sources of income, it will certainly help. The amount required depends entirely on the yield generated by the portfolio.
- With a 4% yield, an investor would need roughly £200,100.
- At 5%, the total falls to around £160,080.
- At 6%, the figure drops again to roughly £133,400.
Targeting stocks with higher yields will naturally reduce the amount of capital you need, but investors need to check those dividends are sustainable in the longer run.
FTSE 100 tobacco giant Imperial Brands (LSE: IMB) has a terrific track record of paying dividends. It’s increased shareholder payouts every year this millennium, with the excusable exception of the pandemic year of 2020. Tobacco shares continue to deliver remarkable returns despite smoking rates declining across much of the developed world.
Imperial Brands has used strong branding, pricing power and customer loyalty to squeeze bigger profits from a shrinking market. It has also expanded into alternatives including heated tobacco and vapes.
Its shares have climbed steadily too. They’re up almost 70% over five years, with dividends on top. But in the last three months they’ve fallen 16%. The price-to-earnings ratio has fallen to just 8.5, suggesting value. Some investors will see this as a buying opportunity but why the dip?
Half-year results (14 May) showed underlying operating profit rising just 0.6% to £1.6bn. Management still expects annual profit growth of 3% to 5% over 2026, but needs a much stronger second half to hit that target. It won’t be easy amid signs that the cost-of-living squeeze is hitting smokers.
Can the shares continue to outperform?
Imperial Brands still expects free cash flow of at least £2.2bn this year, which comfortably supports the dividend. The forward yield is a juicy 6.3%.
Tobacco stocks won’t suit everybody. I don’t buy them myself, but often wish I did. There are threats though. Smoking volumes continue to decline, regulators remain hostile and nobody yet knows whether next-generation products will replace traditional cigarettes, or spark a legal backlash.
Imperial Brands remains highly profitable and hugely cash generative. Personally, I think it’s one of today’s stronger income plays and well worth considering. For those who fancy Big Tobacco I can see a heap of FTSE 100 dividend stocks to consider instead. Some have even more generous yields.
Should you invest £5,000 in Imperial Brands Plc right now?
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And right now, Mark thinks there are 6 standout stocks that investors should consider buying. Want to see if Imperial Brands Plc made the list?
Harvey Jones does not hold any positions in the companies mentioned.
