With so many dividend-paying companies to choose from, it’s not difficult for UK investors to generate a second income in the stock market. And those fortunate enough to have £20,000 sat in their Stocks and Shares ISA can immediately start earning an extra £1,000 a year just by investing in 5%-yielding shares. And looking across the FTSE 350, there are quite a few businesses offering such potential.
Hunting 5% yields
As of June, there are 66 stocks within the FTSE 350 offering a 5% or more level of payout. And this list includes some fairly big names such as HSBC at 5.5%, Aviva at 5.9%, and Imperial Brands (LSE:IMB) at 6.7%. Snapping up £20,000 worth of shares in any of these stocks would instantly start generating even more than £1,300 in passive income.
However, just because a stock offers an attractive yield, that doesn’t mean it’s a guaranteed winning investment. Don’t forget dividends can be cut at any time if the underlying business doesn’t generate enough cash flow. As such, some due diligence is crucial before jumping in. With that in mind, let’s zoom in on the highest-yielding enterprise on this list – Imperial Brands.
Investigating future cash flows
High yields and tobacco companies aren’t a new phenomenon. ESG investors actively avoid buying shares in these types of businesses, while many others are put off by the increasingly hostile regulatory landscape. As such, Imperial Brands, along with other companies like British American Tobacco, have long offered impressive levels of payouts for their shareholders. What’s more, both businesses have long track records of steadily hiking their dividends over time.
So far, that sounds fairly advantageous for those seeking a second income. Even more so, given management has recently reiterated its targets of growing its free cash flow to as high as £3bn to fund future dividends and share buybacks.
However, while that certainly sounds encouraging, hitting this milestone is far from guaranteed. The firm’s latest interim results were fairly lukewarm, with sales falling by 3.1% and operating profits sliding by 2.5%. While these figures were in line with market expectations, the announcement that CEO Stefan Bomhard is stepping down later this year came as a surprise to many.
Despite only being in the role for five years, Bomhard’s retiring and will be moving out of the corner office in October. Under his leadership, the company emerged from the pandemic and more than doubled its market cap. And although he’s selected the current CFO Lukas Paravicini to succeed him, he has some pretty big shoes to fill.
A risk worth taking?
Undergoing a leadership transition while navigating through a tough regulatory environment and an ongoing rollout of new non-tobacco products is no easy feat. This risk’s undoubtedly a big reason why the shares are down almost 10% since the announcement.
So is this a stock worth considering for generating a second income right now? That all depends on personal risk tolerance. If Paravicini can continue to execute Bomhard’s strategy successfully, then a lucrative income stream seems likely. But if he can’t, the recent dip might be the start of another protracted decline in Imperial Brand’s share price.
Investors will have to mull over the possibilities to determine if the risk’s worth the potential reward.
