One of the appealing points about investing in shares is the passive income potential some of them offer my portfolio. But if I do not take the dividends as income and instead reinvest them in a company’s shares, that could help me build bigger sources of income in the long term. There is one UK dividend share I would consider purchasing for my portfolio at the moment because I reckon reinvesting its dividends could help me double my money in under a decade.
High-yield FTSE 100 share
The company in question is tobacco producer Imperial Brands (LSE: IMB). Like some other tobacco companies, Imperial’s business generates a lot of cash flow. That enables it to pay out chunky dividends, which it currently does each quarter.
At the moment, Imperial’s yield is 8.4%. In other words, for each £1,000 I invested today I would expect to receive £84 a year in dividends even if the company does not raise its dividend. But there is also a risk that it could cut its dividend, something that happened a couple of years ago. After all, declining rates of cigarette smoking in most markets could hurt revenue and profitability in the coming years.
But if the dividend remains at its current level, and I reinvested the income from my shares in more shares at the current price, I would expect to have doubled the value of my investment in just nine years.
Doubling my money
The future is an unknown place, so any calculation like this always includes some assumptions. Only time will tell if they turn out to be correct.
For example, to double my money, I need the dividend level to remain the same as it is at the moment or higher, but also for the share price not to fall. If it did, perhaps because of the threats to Imperial’s business I mentioned above, that could mean that even with an 8.4% dividend reinvested each time, my holding takes longer to double in value.
Then again, the opposite might happen. If Imperial’s share price increases, that combined with the dividend could mean that I double my money in less than nine years. The Imperial Brands share price is up 21% in the past year, which I think could be because investors reckon tobacco shares have been beaten down too much. Still, a long-term share price fall is a real possibility. Imperial is down 57% over a five-year period, after all. That could mean that it has lots of room to rebound — or that in the long term, it is a falling knife.
My move on this UK dividend share
I hold Imperial in my portfolio and appreciate its income generation potential. I plan to continue holding it and hoping that the dividends will help me double my investment in under a decade.
As there are risks, however, I will not rely only on Imperial. I will maintain a diversified portfolio, including other non-tobacco shares I like for their income potential.
Christopher Ruane 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.
