When it comes to finding dividend shares for my portfolio, I like to focus on blue-chip FTSE 100 stocks.
Some investors might think that this is a mistake. After all, blue-chip stocks do not tend to offer particularly high dividend yields. However, I believe there are plenty of opportunities in the FTSE 100 index today.
One of my favourite companies currently supports a dividend yield of around 10%, and the stock is currently trading at a single-digit price to earnings multiple (P/E).
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FTSE 100 dividend champion
I am referring to the tobacco giant Imperial Brands (LSE: IMB).
Before I start, I should discuss the ethical considerations of investing in tobacco companies. Some analysts believe that the tobacco industry is in terminal decline. Enterprises are investing heavily in so-called reduced-risk products to try and offset declining volumes of traditional cigarettes, but these are still in their infancy.
There is also a risk that policymakers could suddenly announce a decision to restrict tobacco sales in a key market. This would significantly impact growth and sales for Imperial brands, which could completely derail my investment thesis.
Nevertheless, based on what we know today, I think the FTSE 100 company looks incredibly appealing as an income and growth investment.
At the time of writing, the stock supports a dividend yield of around 10%. It has plenty of cash available to cover this distribution and invest in its operations simultaneously. Indeed, tobacco companies have a reputation for throwing off vast amounts of cash and earning desirable profit margins.
As well as this attractive yield, the stock is also trading at a forward P/E multiple of 6.3. This multiple factors in the company’s decision to exit its Russian investments, which will have a small impact on profit this year.
Management is forecasting net revenue growth around 0% to 1% for the year following the decision to exit Russia.
Risks ahead
No investment analysis would be complete without trying to understand why the stock is so cheap in the first place. I think there are a couple of reasons why the stock has underperformed recently.
There are the general challenges of investing in tobacco companies, which I have outlined above.
There is also a cloud hanging over Imperial Brands as the group has underperformed the market for the past 10 years. The company has made several strategic errors. Profits have stagnated, and its balance sheet has deteriorated.
Still, It now looks as if management is trying to get to grips with these issues. The company has been slashing costs and selling off non-core divisions to improve the strength of its balance sheet.
These initiatives are starting to yield results. The corporation recorded a substantial increase in net profit last year and a reduction in net debt. Based on these changes, I think now could be the perfect time to add the FTSE 100 company to my portfolio, considering its income and valuation credentials.
As it embarks on a new growth stage, I think Imperial Brands could make a great addition to my portfolio.
