Here’s a top income stock with an 8% yield investors should consider buying

With its enticing yield and cash rich model, this Fool explains why investors looking for an income stock should consider this business.

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One income stock I believe could boost passive income is Imperial Brands (LSE: IMB). Here’s why.

Imperial shares up in smoke?

I’m not surprised to see the Imperial share price struggle recently and historically. External issues as well as the general negative outlook towards tobacco businesses due to ethical reasons haven’t helped. Of course, ESG investors shun tobacco stocks due to the ill-effects of smoking.

As I write, Imperial shares are trading for 1,783p. At this time last year, they were trading for 2,073p, which means a 13% drop over a 12-month period.

An income stock with a great record

Share price growth would be nice. However, when it comes to Imperial shares, I’m here for the dividends.

The glory days of double-digit dividend growth may be behind us when it comes to Imperial’s investor return policy. However, there’s still plenty of money in the kitty to help savvy investors boost passive income, if you ask me. The pandemic put paid to the bumper days of huge dividends but since then, the business has steadily begun to increase dividends once more.

As I write, Imperial’s dividend yield of 8% is extremely attractive. As an income stock, its yield is far higher than the FTSE 100 average of 3.8%. In addition to this, Imperial’s recent share price drop makes the shares look good value for money on a price-to-earnings ratio of just 10.

I do understand that past performance is not an indicator of what will happen in the future. However, Imperial looks like a business in decent shape that could help boost passive income as part of a diversified portfolio of stocks.

To start with, the tobacco industry was, and still is, a cash heavy sector. This bounty of cash has made tobacco stocks like Imperial popular among passive income seekers historically. Smoking numbers may be declining in the UK and other developed countries, but Imperial still makes lots of money in developing nations where smoking levels are at all-time highs. This can support consistent dividends in my eyes.

Furthermore, Imperial has recently begun to focus on what it does best, which is make and sell cigarettes. Disposal of its cigar business to ease its debt burden as well as scaling back its tobacco alternatives ventures should help the business boost performance and payouts. When I add to this Imperial’s impressive brand power and wide geographic footprint, there’s lots to like.

An income stock with challenges to navigate

I must note that regulation is tightening and an ever-present threat for Imperial. A prime example of this recently is the UK Prime Minister looking to introduce plans to essentially raise the legal age for buying cigarettes. This could hurt demand for Imperial’s products in the UK at least, especially its performance and investor returns.

Furthermore, Imperial does have a fair bit of debt on its balance sheet. This is bad news as it means profits may be used to pay down debt. Plus, in the high interest rate economy we find ourselves in, this debt can be costlier to service.

Despite challenges, I believe Imperial is a great income stock that could provide consistent dividends. However, it’s worth noting that dividends are never guaranteed.

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 assessed. Consider taking independent financial advice.

Sumayya Mansoor has no position in any of the shares mentioned. The Motley Fool UK has recommended Imperial Brands Plc. 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.

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