FTSE heavyweight Imperial Brands (LSE: IMB) has long been one of my key income stocks. Over the years, it has delivered significant earnings growth, which ultimately drives dividend (and share price) rises.
A risk here is any slippage in its transition away from tobacco products and to nicotine substitutes. This could give an advantage to its competitors doing the same thing. Another would be any new litigation arising from one of its new products, which could lead to significant costs.
However, analysts forecast that its earnings will increase by a solid 4% over the medium term. So what sort of returns from dividends and share price can I expect from here?
Consistently rising dividends
Imperials Brands increased its annual payouts in each of the past five years, from 139.08p in 2021 to 160.32p in 2025. These generated average annual dividend yields of 8.9%, 7.6%, 8.8%, 7.1%, and 5.1%.
The declining recent yield — despite the hike in annual payout — underlines that these returns can change over time.
That said, analysts expect dividend payouts to rise to 168.7p this year, 177.2p next year, and 186.9p in 2028. These would generate respective dividend yields of 5.5%, 5.8%, and 6.1%.
By contrast, the present FTSE 100 average is just 3.1%, and the ‘risk-free rate’ (10-year UK gilt yield) is 4.9%.
How much can be made?
The standard investment cycle for long-term investors is around 30 years. It begins with first investments at around 20 and early retirement options at about 50.
After 10 years on the forecast 6.1% yield, investors would make £16,752 on an initial £20,000 holding. This assumes that the dividends would be reinvested to harness the extraordinary power of dividend compounding.
After 30 years on this basis, the dividends would increase to £104,101. Including the initial £20,000, the total value of the holding would be £124,101.
And that would generate an annual income of £7,570.
A share price bonus too?
I always buy stocks that look underpriced to their ‘fair value’. The number represents the true worth of the underlying business, while price is simply whatever the market will pay at any stage. The key point here is that asset prices tend to converge to their fair value over time. So knowing and quantifying the difference between the two is crucial for long-term investors’ profits.
In Imperial Brands’ case, a discounted cash flow analysis — including an assumed 8.8% discount rate — shows the shares are 41% undervalued at their current £30.54 price.
Some analysts’ DCF modelling is more bullish than mine, others more bearish, depending on the variables used. However, based on my DCF, the fair value for the shares is around £51.76 — substantially higher than today’s price.
So that gap suggests a potentially terrific buying opportunity to consider today if those DCF assumptions prove accurate.
My investment view
I have held the stock for some time now, periodically adding to it as prices dip. Given its recent price drop, its solid forecast earnings growth, and its extreme undervaluation, I will be adding to my holding soon.
I have also identified other similar stocks with even higher dividend yield forecasts in the coming years.
