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Building a second income is a key priority for investors and it’s easy to see why. A consistent flow of shareholder payouts can boost growth if reinvested straight back into a Self-Invested Personal Pension (SIPP) or Stocks and Shares ISA.
Dividends can then be drawn as income in retirement. The key is to start early and give them time to compound and grow. So how big a pot do investors need to generate a decent passive income of, say, £9,999 a year?
That depends on the yield. Today, the FTSE 100 pays average income of 3.25%. At that rate, an investor would need £307,650 to hit that £9,999 target.
However, if they build a hand-picked basket of income stocks yielding 5%, that target drops to £199,980. While buying individual stocks takes more time and effort, in the longer run I think it’s worth it.
Imperial Brands: a top dividend stock
One dividend stock worth considering is cigarette maker Imperial Brands (LSE: IMB), which has a trailing yield of exactly 5%. That’s far from the highest on the index. Wealth manager M&G yields 7.42% and insurer Phoenix Group Holdings yields 7.86%. I hold both the financial stocks in my SIPP, which contains around 15 FTSE 100 stocks.
Tobacco shares have drawbacks. Smoking kills and consumption in the West has been falling for decades. Yet Big Tobacco survives and thanks to its captive audience remains a terrific investment, with reliable cash generation and generous dividends as a result. The major firms have protected themselves through pricing power and brand loyalty. They’ve kept margins robust and protected market share, even as volumes slipped.
On 18 November, Imperial Brands delivered another strong set of results, with operating profit up 4.6% to £4bn in the year to 30 September.
Imperial has increased dividends every year this century, with one exception. It slashed the dividend by 33% in 2020, from 206.57p per to 137.71p. It has since climbed to 160.32p, but that’s still short of 2019 levels. Anyone weighing up Imperial Brands should also check out rival British American Tobacco, which raised its dividend every year this Millennium without exception.
Steady earnings momentum
Shareholders in Imperial have little to grumble about though. The shares are up 26% in the last year and 135% over five. All dividends sit on top of that. Anyone who reinvested those payouts will have enjoyed an even better total return.
After such a strong share price growth, I’m expecting a slower pace from here. Yet the shares still look decent value with a price-to-earnings ratio of 10.7. Tighter regulation is a constant threat and health campaigns will continue to weigh on sentiment. Over the very long run there’s a chance that smoking could fade away, but the industry has shown astonishing resilience thus far. Anyone comfortable with the risks might consider buying today.
Building a balanced plan
A single stock never makes a complete income portfolio. There are plenty more exciting FTSE 100 dividend growth stocks worth checking out today. Don’t hang around, because the earlier investors buy them, the more time their money has to compound and grow.
