I’d buy this FTSE 100 share to try and double my money in 9 years

Christopher Ruane explains in detail how he would aim to double his money in under a decade by investing in this FTSE 100 share.

| More on:

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

The index of FTSE 100 shares includes some of the largest companies in the country. Large and long-established companies can offer limited growth prospects. But what they may lack in growth potential, some can offer in potential income appeal.

One such share is tobacco maker Imperial Brands (LSE: IMB). Here’s how I would invest £1,000 in Imperial Brands today and hope to see my capital double in less than a decade – just by sitting back and letting it grow.

Imperial Brands yield

What’s important in this example is Imperial’s dividend. As a tobacco manufacturer, the company is able to benefit from regular customer demand. Input costs are fairly low, but owning premium brands such as John Player Special and West gives Imperial pricing power. However, even considering the emergence of modern tobacco products such as vaping, there are limited growth opportunities on which a tobacco company can spend its profits. Last year, for example, net capital expenditure of £274m represented under 2% of Imperial’s £14.4bn of revenue.

That means that tobacco companies such as Imperial tend to throw off large amounts of free cash. That can be used to fund dividends – in Imperial’s case, to the tune of £1.8bn last year. Even after cutting its dividend in 2020, Imperial currently yields 8.6%. That is one of the highest yields of any FTSE 100 share.

The power of compounding

By putting £1,000 into Imperial today, I would hope to have £1,086 a year from now. If I reinvested the dividends each time I got them, my capital ought to grow faster. So in the second year, for example, I would be looking at 8.6% of £1,086, not just £1,000. That could continue year after year. Within nine years, if the compound annual growth rate remained 8.6%, my £1,000 would have more than doubled.

Nine years may sound like a long time, but I actually think it is very fast. Using the Bank of England base rate of 0.1%, doubling £1,000 by compounding interest would take 694 years. Of course, there’s less risk investing in a bank account rather than shares, whether or not they’re FTSE 100 shares. But there’s a 100% risk I’d be dead centuries before my 0.1% yielding investment doubled!

So, what about the specific risks when it comes to Imperial Brands? A key one is future smoking habits. In many countries, the number of smokers is in long-term decline. That could lead to falling revenues and profits, which would threaten Imperial’s ability to pay a dividend. Imperial is trying to fend off this risk. Its strategy is to build market share in five key sales territories as a way to mitigate falling market size. But doubling down on a declining format may be a short-term fix at best, setting up more problems for the future if cigarette volumes collapse altogether. As well as a risk to the dividend, the share price could also fall.

Why I’d buy this FTSE 100 share today

While Imperial Brands currently yields 8.6%, that will change if the share price moves. 

But I would buy more Imperial Brands shares today for my portfolio, although I have shares in other companies, so my risk is reduced by some diversification. 

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be considered so you should consider taking independent financial advice.

Christopher Ruane owns shares in Imperial Brands. 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.

More on Investing Articles

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 UK dividend stocks with yields over 10%

These dividend stocks are the highest yielders on the UK market, says Roland Head. But how safe are these generous…

Read more »

Couple relaxing on a beach in front of a sunset
Investing Articles

I’d start buying shares for passive income with this pair

Our writer is looking to earn passive income via investing, and here are two leading stocks he might buy.

Read more »

Tanker coming in to dock in calm waters and a clear sunset
Investing Articles

Here’s the Shell dividend forecast through to 2024

The Shell dividend is still nearly 50% below 2019 levels. Will the oil giant use record profits to rebuild its…

Read more »

Warren Buffett at a Berkshire Hathaway AGM
Investing Articles

3 FTSE 100 stocks I think Warren Buffett might love!

Warren Buffett made his fortune thanks to the success of US shares. But here are three FTSE 100 stocks I…

Read more »

Bearded man writing on notepad in front of computer
Investing Articles

Down 75%, has the Deliveroo share price bottomed?

The last 12 months have been torrid for the Deliveroo share price. But does this open an opportunity to grab…

Read more »

Smartly dressed middle-aged black gentleman working at his desk
Investing Articles

Is now FINALLY the time to buy Lloyds shares?

Lloyds shares have leapt in value as market confidence has improved. Should I buy the FTSE 100 bank before it…

Read more »

Black woman using loudspeaker to be heard
Investing Articles

3 high-dividend FTSE 250 stocks to buy right now!

The London Stock Market is packed with top high-dividend stocks to buy. Here are a handful I'm considering buying, despite…

Read more »

Woman using laptop and working from home
Investing Articles

How I’m using my Stocks and Shares ISA to generate lifelong passive income

I’m looking to build a portfolio of assets that will pay me an income in my retirement. Here’s how I’m…

Read more »