Recent performance

At first glance, the company’s half-year results were underwhelming. Indeed, revenues fell 1.3% year-on-year to £15.4bn and, in the same period, operating profits fell 25% to £1.2bn. Declining profits could result in the dividend being cut. For an income stock, this is not good news. 

However, upon further inspection, there were several positives to take away from the update. For example, adjusted profits, which do not include charges related to exiting Russia, rose 2.9% year-on-year. In addition, Imperial was able to improve its financial position, reducing net debt from £11bn to under £9.7bn. 

Most importantly, I was impressed by the performance of the New Generation Products (NGP) division, which saw revenue growth of 8.7%. This was driven by the introduction of several innovative new products in Europe and the US. With traditional tobacco products becoming less popular, I believe that this division will be fundamental to Imperial’s success in the future. With more innovative products coming to market, future growth in this division also seems likely.

Other factors to consider 

One of the main appealing factors of Imperial is its large yield. Indeed, after another 1% rise this year, the full-year dividend is expected to total around 140p per share. This gives Imperial a dividend yield of 8%, which is far larger than other FTSE 100 shares. With a dividend cover of around 1.5, it is also very sustainable. For me, this makes this Imperial one of the best dividend stocks around. 

With inflation one of the main concerns for investors right now, I believe that tobacco companies can deal with this well. This is because they can raise the prices of their products and consumers are likely to continue buying. 

However, I do have slight concerns about the long-term future of the company. This is because tobacco is well-known for its unhealthy properties and the number of new smokers is declining. Further, although the company’s NGP division is delivering strong growth, it still only accounts for 3% of the group’s revenues. This means that I must take the recent growth in the NGP division with a pinch of salt. 

Why would I buy this dividend stock? 

Although there are several risks with Imperial, I feel that these are now factored into the firm’s share price. Indeed, it currently trades at a price-to-earnings ratio of around 8.5, which is lower than rivals including British American Tobacco and Philip Morris. This indicates that the group may be slightly undervalued. The 8% dividend yield also offers a very appealing reason to buy. Therefore, to help protect my portfolio from the current macroeconomic uncertainties, I may add some Imperial shares to my portfolio. 

The post An 8% yielding dividend stock I’d buy for passive income appeared first on The Twelfth Magpie.

More reading

• How much do you need in an ISA to target a £9,999 second income that rises every year?
• 6.7% yield! Is Imperial Brands an irresistible FTSE 100 share to consider?
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Stuart Blair has no position in any of the shares mentioned. The Motley Fool UK has recommended British American Tobacco and Imperial Brands. 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.

The UK’s FTSE 100 is renowned for its portfolio of blue-chip stocks. The index has an average dividend yield of almost 4%, with some dividend stocks boasting yields of 8%-10% on the upper end. With the index in the red this year, there’s room for me to buy the FTSE 100’s top income stocks for a bargain.

High yields are a commodity

Rio Tinto (LSE: RIO) has the FTSE 100’s highest dividend yield of 11%, paying investors approximately £3.07 per share. It’s also worth noting that the mining firm had a stellar 2021, allowing it to pay a special dividend of around £0.46 per share. This brings Rio’s total dividend to £3.53 per share, with its share price also up 8% this year!

While high dividends are attractive, it’s not always sustainable. This tends to be the case with mining companies as they operate in economic cycles. Given that the global economy is expected to slow down this year, Rio’s top line is expecting some bruising. Additionally, China, its biggest customer, still has city-wide lockdowns in place to eradicate Covid. This has halted many construction projects and demand for iron ore. Therefore, I am doubtful that the blue-chip stock can continue generating a high level of passive income for investors.

Bricks and mortar

Persimmon (LSE: PSN) is not historically known for paying a high dividend. Its current dividend yield of 11% is only so high due to its share price plunging 25% this year. That’s because as share prices decrease, yields go up as a result. Nonetheless, the company is expected to pay a dividend of £1.10 per share, down £0.15 from its previous payment.

The reason for this is the firm’s decreasing margins. Its initial dividend of 11% was not well covered by earnings nor forecasts to begin with. Not to mention, higher interest rates are expected to slow the demand for houses. This would have an impact on Persimmon’s sales revenue. Combine that with rising material costs and the FTSE 100 housing giant doesn’t have as much cash to hand out to investors. However, its ex-dividend date is in a month’s time, and could present an opportunity for me to make some passive income on a bargain.

An Imperial dividend

The Imperial Brands (LSE: IMB) share price is up 3% this year due to its defensive nature. Pair that with a dividend yield of 8%, and this stock has been a great asset for investors this year.

The tobacco firm released a positive trading update last month. Smokers do not seem to be quitting in a hurry, and its next generation products showed positive results. This indicates that there may be a future for the company when or if cigarettes die out. Management also mentioned that the firm is in line to meet expectations when it reports its half-year results.

We (expect) full-year net revenue growth of around 0-1% on a constant currency basis and adjusted operating profit growth of around 1%.

Source: Imperial Brands Pre-Close 2022 Trading Update

For that reason, Imperial Brands is likely to continue handing out a healthy dividend as one of the index’s best income stocks.

The post Are the FTSE 100’s top income stocks a bargain? appeared first on The Twelfth Magpie.

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• This 5.5%-yielding income stock’s at a 13-year low and cheap to-boot! Time to consider buying?
• How much do you need in an ISA to target a £9,999 second income that rises every year?
• Down 65% but yielding 6%! Is this FTSE 100 dividend stock an unmissable bargain?
• A 6.7% forecast yield and 53% below ‘fair value’! 1 stunning FTSE income stock for investors to consider today?

John Choong has no position in any of the shares mentioned at the time of writing. The Motley Fool UK has recommended Imperial Brands. 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.