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With many British investors eager to earn passive income in the stock market, dividend shares are often among the most popular. After all, who doesn’t love the idea of making money while sleeping?
The good news is that the FTSE 100 is filled with mature, dividend-paying companies with impressive track records. And among these stands Imperial Brands (LSE:IMB).
While not everyone’s keen on the idea of owning shares in a tobacco business, this lack of interest has resulted in a historically above-average yield that still stands at an impressive 5.2%. And for around £4,500, investors can snap up 150 shares and unlock a roughly £240 passive income overnight right now.
But is this actually a good investment?
Impressive payouts
Even with all the regulatory and tax pressures placed on the tobacco industry over the last 20 years, Imperial Brands’ revenue and cash flows have proven to be remarkably resilient. And, consequently, the company boasts a long track record of hiking shareholder payouts (ignoring the dividend cut issued during the pandemic).
However, with global awareness of the health impacts from combustible tobacco products on the rise, the company’s seen a slow but secular decline in cigarette volumes. And the same’s happened to its leading rivals as well.
So far, the strategy of the entire sector has seemingly been to offset volume declines through price hikes. Given the addictive nature of its products, this pricing power has been relatively easy to exercise, even with stiff competition. But this strategy has its limits as more and more smokers are simply priced out of the market.
That’s where Imperial Brands’ Next Generation Products (NGPs) platform enters the picture.
By building out its portfolio of healthier cigarette alternatives like vapes, heated tobacco, and oral nicotine, management’s seeking to further offset the steady decay of its core cigarette business. And while it’s still a small part of the business today, this segment’s expanding rapidly, contributing £368m of revenue in its 2025 fiscal year (ending in September).
Risk versus reward
With the performance of its NGPs improving in recent years, the Imperial Brands share price has been on an impressive upward trajectory since early 2024, climbing over 55% over the last two years. However, there’s no denying that this part of the business remains unproven.
NGPs are still loss-making. And while management’s projecting a breakeven point to emerge between 2027 and 2028, there’s still a lot of catch-up required before it can replace legacy tobacco profits. In the meantime, the group’s net debt’s on the rise.
While the firm’s borrowings are still at manageable levels, higher gearing ultimately puts more long-term pressure on cash flows and, in turn, dividends. As such, dividend growth could actually slow rather than accelerate in the coming years, even if NGP performance remains on track.
So where does that leave income investors?
The bottom line
For those seeking stable dividends and are less concerned about payout growth, Imperial Brands does seemingly offer an attractive yield, albeit with a few crucial risks that must be considered carefully. But for income investors looking to own stocks that can meaningfully expand their dividends each and every year, I think there are far better opportunities to explore elsewhere.
