Under current legislation, the State Pension is increased each year by the higher of 2.5%, inflation, or earnings growth. Although this ‘triple lock’ has helped ensure that pensioners’ incomes have beaten prices, the current full entitlement of £12,548 will only provide for a basic standard of living.
That’s why many people have a Stocks and Shares ISA. They are hoping these will produce sufficient income to make a big difference later in life. But how much would be needed to produce the same amount as the current State Pension? Let’s find out.
A bit of number crunching
The top 10 FTSE 100 stocks are currently (14 June) yielding 6.6%.
A portfolio of these worth £190,121 would produce dividend income of £12,548 a year, the same as the State Pension.
But dividend shares can also serve another useful purpose. Instead of spending the payouts received, some investors prefer to use the cash to buy more shares. Why?
They do this because the dividends are a substitute for having to find new money. For example, someone starting with £10,000 could earn £660 in dividends in year one. Use this money to buy more shares and the cash received in year two would increase to £704. And so on.
After 25 years, an ISA would be worth £49,423. That’s nearly five times the initial lump sum.
Going up in smoke?
One of the FTSE 100’s top 10 yielders is Imperial Brands (LSE:IMB), the tobacco group. It’s currently returning 5.9%. Despite its above-average dividend, I recognize that some don’t like the idea of investing in the industry on ethical grounds.
However, as the chart below shows, it has a good track record of increasing its payout. Over the past 10 years or so, its yield has been consistently above 5%. Incidentally, don’t be alarmed by the drop in 2026. It pays quarterly dividends and we are only half-way through the group’s current financial year.
A useful calculator on the company’s website shows that someone who first took a stake in June 2001 will have received dividends of £26.53 a share since then. Amazingly, this is equivalent to 96.09% of the amount invested.
In a year’s time, it’s probable (there can never be any guarantees when it comes to shareholder returns) that they will have received all of their money back from dividends alone.
My view
To be honest, despite the impressive dividend history of Imperial Brands, I don’t want to invest. Due to health concerns, the group is transitioning away from cheap-to-make cigarettes that have, over the years, proven to be highly cash generative.
Now, as smoking habits change, it’s switching to alternatives like vapes and heated tobacco. However, these are also coming under scrutiny from those concerned about the long-term health impacts.
From a financial perspective, non-combustible products have lower margins and require more up-front investment. This could lead to further borrowing, which is already on the high side. I may be mistaken, but I can’t see the group’s new generation of products being as lucrative as traditional cigarettes.
It might be a few years away yet but, ultimately, I suspect Imperial Brands’ dividend will come under pressure. On this basis, I believe there are more attractive long-term passive income opportunities to consider elsewhere.
Should you invest £5,000 in Imperial Brands Plc right now?
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James Beard does not hold any positions in the companies mentioned.
