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An 8% yielding dividend stock I’d buy for passive income

A person holding onto a fan of twenty pound notes

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Like many other investors, my portfolio has been feeling the pain of the current macroeconomic uncertainties. My growth stocks have been the worst affected, as they are the most susceptible to inflationary pressures and high interest rates. Therefore, I have been searching for inflation-resistant dividend stocks to help ease the pain. The tobacco giant, Imperial Brands (LSE: IMB), offers one great solution. 

Recent performance

At first glance, the company’s half-year results were underwhelming. Indeed, revenues fell 1.3% year-on-year to £15.4bn and, in the same period, operating profits fell 25% to £1.2bn. Declining profits could result in the dividend being cut. For an income stock, this is not good news. 

However, upon further inspection, there were several positives to take away from the update. For example, adjusted profits, which do not include charges related to exiting Russia, rose 2.9% year-on-year. In addition, Imperial was able to improve its financial position, reducing net debt from £11bn to under £9.7bn. 

Most importantly, I was impressed by the performance of the New Generation Products (NGP) division, which saw revenue growth of 8.7%. This was driven by the introduction of several innovative new products in Europe and the US. With traditional tobacco products becoming less popular, I believe that this division will be fundamental to Imperial’s success in the future. With more innovative products coming to market, future growth in this division also seems likely.

Other factors to consider 

One of the main appealing factors of Imperial is its large yield. Indeed, after another 1% rise this year, the full-year dividend is expected to total around 140p per share. This gives Imperial a dividend yield of 8%, which is far larger than other FTSE 100 shares. With a dividend cover of around 1.5, it is also very sustainable. For me, this makes this Imperial one of the best dividend stocks around. 

With inflation one of the main concerns for investors right now, I believe that tobacco companies can deal with this well. This is because they can raise the prices of their products and consumers are likely to continue buying. 

However, I do have slight concerns about the long-term future of the company. This is because tobacco is well-known for its unhealthy properties and the number of new smokers is declining. Further, although the company’s NGP division is delivering strong growth, it still only accounts for 3% of the group’s revenues. This means that I must take the recent growth in the NGP division with a pinch of salt. 

Why would I buy this dividend stock? 

Although there are several risks with Imperial, I feel that these are now factored into the firm’s share price. Indeed, it currently trades at a price-to-earnings ratio of around 8.5, which is lower than rivals including British American Tobacco and Philip Morris. This indicates that the group may be slightly undervalued. The 8% dividend yield also offers a very appealing reason to buy. Therefore, to help protect my portfolio from the current macroeconomic uncertainties, I may add some Imperial shares to my portfolio. 

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