Imperial Brands (LSE:IMB) has one of the best dividend records on the FTSE 100. It’s raised shareholder payouts every year since 2000, if you exclude pandemic-affected 2020. Few UK blue-chip shares boast that kind of long-term resilience.
What’s more, dividend yields on Imperial Brands shares have consistently beaten the Footsie average of 3% to 4%.
The question is, can the tobacco titan continue delivering juicy cash rewards? City analysts are confident it can, as shown in the table below:
| Year | Predicted dividend per share | Dividend yield |
|---|---|---|
| 2026 | 1.67p | 6.1% |
| 2027 | 1.77p | 6.4% |
| 2028 | 1.85p | 6.7% |
You might think Imperial Brands is a ‘no brainer’ share to buy for passive income, then. But here’s the thing. I think it could prove to be a classic dividend trap for investors today…
Poor returns
A large and growing dividend can be a powerful wealth builder. Reinvesting these cash payouts into additional shares creates a snowball effect that throws off even more dividends. Over time, this compounding process can supercharge portfolio growth.
But buying income stocks based solely on their dividends can be a recipe for disaster. Let’s take the case of Imperial Brands. Sure, it’s delivered dividend increases in nine of the last 10 years. Over the period, it’s also delivered an average 7.3% dividend yield.
However, Imperial Brands’ share price has tanked 26% since June 2016. The result? A meagre average annual return of 1.8%.
What’s next?
To illustrate, a £500 monthly investment in Imperial Brands shares since 2016 (with dividends reinvested) would have turned into ‘just’ £65,685 today.
The same amount put into a FTSE 100 tracker fund, meanwhile, would have delivered a far greater £98,415. That’s based on an average annual return of 9.3%.
History isn’t always a reliable guide to future performance. But the driver behind Imperial Brands’ poor returns since 2016 persists today: the steady decline of the global cigarette market.
Rival British American Tobacco said this month that tobacco industry volumes dropped 2.5% in the first half. That was worse than the 2% predicted decline, and illustrates the speed at which consumers are dumping cigarettes. The World Health Organization (WHO) expects global tobacco use to tumble almost 9% between 2010 and 2030, to 17.4% of the population.
What could turn Imperial Brands around?
Tobacco companies are rolling out alternatives like vapes and oral nicotine pouches to combat this. The problem is the costs of developing, marketing, and distributing these new technologies is massive, meaning they don’t generate any profits.
Imperial Brands’ shares actually tanked this month after it announced adjusted operating losses from these products “are expected to be moderately higher“. The question is, will its technologies like its Pulze heated tobacco ever make significant money if regulators clamp down on them as they have traditional cigarettes? I’m not convinced.
Imperial Brands’ enormous yields may make it an attractive stock for more adventurous investors. Personally, I’d rather find less risky FTSE 100 dividend stocks to buy.
Should you invest £5,000 in Imperial Brands Plc right now?
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Royston Wild does not hold any positions in the companies mentioned.
