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A 12%-yielding FTSE 100 dividend stock I’d buy for 2020

Kirsteen Mackay
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Given that 2019 has been another tough year for investors in the UK, you can be forgiven for feeling nervous about where to invest your hard-earned cash in 2020.

Dividend investing for long-term wealth accumulation is a great strategy, tried and tested by legendary investors such as Warren Buffett and Benjamin Graham. Reinvesting your dividends means you get interest paid on your interest and over time, your financial portfolio value can swell to create a substantial sum.

Financial freedom

For beginners to investing in the UK, the FTSE 350 is the place to get started in buying shares in the stock market. This index contains the top 350 UK companies sorted by their value. The largest 100 come under the FTSE 100 banner, while the next 250 come under the FTSE 250 index. Combined, they make up the FTSE 350.

As a beginner to stock market investing, I think it’s best to play it safe and focus on the FTSE 100. These companies are usually more cushioned from market volatility, thanks to their large market capitalisations. Often the FTSE 100 companies are global, which means business dealings are widespread, diluting risk to shareholders.

Imperial Brands

One such company is Imperial Brands (LSE:IMB). This tobacco business, based in Bristol, has had a dreadful two years, with many shareholders losing as much as 49%. Nevertheless, its fundamentals look pretty good and I’m tempted by its low share price and monster dividend yield of 12%.

Its portfolio includes recognisable brands like Golden Virginia and Rizla. As the western world witnesses a decline in cigarette smoking and a major shift to a more health-conscious society, tobacco firms are looking to diversify into next-generation products (NGP) such as e-cigarettes. Imperial Brands is addressing this with its own brand MyBlu.

This is not completely without challenges. There has been a lot of negative publicity and investors are understandably nervous about the future and reality of a regulatory clampdown that may ensue. Imperial Brands’ share price fell 10% on the news that Donald Trump vowed to ban flavoured varieties in September. However, he has since reneged on this after his political aides advised him to reconsider.

As I write, Imperial Brands has a price-to-earnings ratio of 16, earnings per share are £1.06 and the dividend yield is 12% with cover of 0.5. I’m inclined to worry that such low dividend cover means it may be at risk of a cut, but several top management figures recently bought shares in IMB, reassuring the public that the future looks brighter.

Imperial Brands claim to always be on the lookout for new opportunities to sell products, by meeting consumer needs. Recent examples of this include its launch of a MyBlu starter pack, a product designed to help adult smokers make the switch to vaping.

In November, it launched a Lambert & Butler roll-your-own variant of tobacc, to address consumer demand for more affordable alternatives to cigarettes. 

With the rise in demand for cannabinoid products, it has also been branching into the cannabis sector.

While there will undoubtedly be hurdles to cross for this tobacco company transitioning its product line, I think it’s well-placed to forge ahead. Smoking is not about to end and many of its current offerings have a loyal customer base. I think the Imperial Brands share price will increase in 2020 and I consider it a Buy.

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Kirsteen has no position in any of the shares mentioned. 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.

Motley Fool UK 2019