Owning shares in companies that distribute their earnings as dividends can be a great way of creating a second income. And I think the UK has some terrific choices for investors with this aim.
Unilever (LSE:ULVR) is a good example. In my view, an impressive track record, a strong competitive position, and a promising outlook make it well worth considering for income investors.
Dividends
Unilever has a pretty good history when it comes to paying dividends to shareholders. That’s no accident – the firm operates in an area that’s less cyclical than most.
Unilever dividend per share 2004-24
Created at TradingView
Regardless of what’s going on in the economy, people need to eat, wash and clean their houses. And Unilever has managed to use this to steadily increase its dividends to shareholders over time.
Right now though, the stock’s in an interesting position. Interest rates staying higher for longer have caused the dividend yield to increase to 4% – which is unusually high.
Unilever dividend yield 2014-24
Created at TradingView
As a result, I think this is a particularly good time to consider buying Unilever shares for the long term. The combination of a growing dividend with a decent starting yield is an attractive one to me.
Brand power
Demand in Unilever’s industry isn’t likely to fluctuate. But switching costs are low and there’s a constant risk of consumers trading down, especially if inflation proves more durable than expected.
The company’s strategy for this has involved relying on the power of its brands. And it has recently been divesting some of these to focus on its strongest lines that can generate the best returns.
As part of this, Unilever has announced plans to offload its ice cream division. Despite having some of the strongest brands in the category, the frozen supply chain makes it expensive to produce.
With the additional threat of anti-obesity drugs dampening demand, I think the move to divest the ice cream range is a good one. I’m expecting this to support further dividend growth going forward.
A £10,100 second income
Investing £20,000 in Unilever stock today would get me 532 shares, which would earn me around £787 in dividends this year. But I’m expecting this to rise over time.
Over the last 10 years, the company’s increased its dividend by an average of 5% a year. If this continues, 532 shares could be distributing a second income worth £3,400 a year after 30 years.
That’s not all though – I could reinvest my dividends as I go to increase my investment. Doing this at a 4% yield would take my stake in Unilever to 1,659 shares over three decades.
Combining that with a bigger dividend would take my dividends to £10,100 a year. And I think that’s an attractive return for a £20,000 investment today.
Dividend returns
Realising the kind of return I’ve outlined here relies on two things. One is Unilever continuing to increase its dividend per share and the second is the dividend yield remaining high.
When it comes to investing, there are no guarantees. But I think the stock gives investors like me the best possible chance to generate a solid second income from a cash investment today.
