If you’re a high-yield dividend investor, it’s a great time to be in the markets right now. With so many investors focusing on growth, value stocks are being totally neglected and that means there are some huge yields on offer from well-known FTSE 100 companies at present.
Today, I’m looking at a Neil Woodford-owed FTSE 100 dividend stock that offers a yield of nearly 7% at the moment.
Tobacco manufacturer Imperial Brands (LSE: IMB) has an outstanding track record as a dividend stock. The group has now lifted its dividend by 10% per year for 10 consecutive years, which is an amazing achievement, especially when you consider the headwinds the industry has faced over this time. Yet despite this incredible dividend growth, Imperial Brands, like the rest of the tobacco sector, is out of favour right now because investors are concerned that the glory days for the tobacco industry are over.
For dividend investors, I think the poor sentiment towards the stock has created a compelling opportunity, as the trailing yield from Imperial now stands at 6.8%. We often hear how stocks can generate returns of around 7%-10% per year on average over the long term, and with Imperial, you can almost pick up that return from yield alone. And with the last financial year’s payout equating to a payout ratio of 6.9%, there could be more dividend growth to come. Currently, analysts forecast a cash payout of 205p for next year, which equates to a prospective yield of an even higher 7.5%. Put simply, Imperial Brands is a cash cow.
I can understand the concerns that many investors have over the tobacco industry, as smoking rates are declining across the Western world. However, that’s only part of the story. What’s interesting is that according to a recent report from the World Health Organisation (WHO), the pace of decline is actually slowing. Furthermore, due to fast population growth across Asia and Africa, like it or not, the number of smokers in these regions is actually forecast to increase in the years ahead, which will offset the reduction in demand across developed countries. So the demand for traditional tobacco products may not fall off as quickly as some people think it will. I think it’s far too soon to say that it’s game over for the world’s tobacco companies.
Top Woodford holding
It’s worth noting that while the sector is out of favour, some of the UK’s top investors do continue to hold tobacco stocks in their portfolios. Imperial Brands is actually the top holding in Neil Woodford’s Equity Income fund, with a weighting of 8.6% at the end of September. And US tobacco giant Philip Morris was the fourth-largest holding in Terry Smith’s Fundsmith Equity fund at the end of October. So clearly, Woodford and Smith see value in the sector at the moment.
With analysts forecasting earnings of 276.4p per share for this year, Imperial Brands currently trades on a forward-looking P/E ratio of just 9.9. There are risks to the investment case, of course, yet given that low valuation, and the high 6.8% yield on offer, I believe the risk/reward skew looks attractive and I rate the stock as a ‘buy.’
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Edward Sheldon 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.