In tough times, the extra income generated by dividend shares can be extremely valuable. And things are pretty tough right now.
Geopolitical tensions are the highest they’ve been in some time. That’s bad for the economy, but it might be good for investors.
Crisis? What crisis?
Covid-19 brought huge amounts of uncertainty and share prices crashed as a result. But this meant dividend yields shot up.
Opportunistic investors were able to take advantage of the uncertainty. And returns for those who bought dividend shares then have been terrific.
The situation today isn’t quite the same – conflict in Iran isn’t the same as a global pandemic. But the overall uncertainty level is extremely high.
With the US focused on the Middle East, some commentators are concerned that things might escalate elsewhere. This includes Taiwan and Eastern Europe.
That might make the situation the most uncertain since the pandemic. And that doesn’t sound like a good time to consider buying stocks.
The stock market, however, is forward-looking. As a result, a number of stocks already look cheap and dividend yields have been rising.
Where to look?
The likes of BP and Shell are obvious potential candidates at a time like this. Both stocks look cheap with oil prices above $95.
I doubt, however, that this is going to remain the case. The US sees higher oil prices as a short-term necessity for long-term political stability.
Whether or not that comes to pass is another question. But I’m doubtful about how long oil prices can remain at these levels.
I think investors need to look past the next few weeks and months. Instead, there’s a chance to focus on companies that can do well for years.
One example is Unilever (LSE:ULVR). The stock is down 14% in the last month and the dividend yield has hit 3.75% as a result.
Opportunities
In recent years, the chance to buy Unilever shares with that kind of dividend yield hasn’t come around often. So it’s worth paying attention when it does.
Investors briefly had the chance a couple of years ago. But the business is arguably in a much stronger position than it was back then.
One thing that hasn’t changed is the company’s scale. This gives it a big advantage when it comes to distribution and this is still firmly intact.
The firm’s brand portfolio, however, is much stronger than it was. Unilever has divested some of its weaker lines to focus on its more valuable ones.
That’s resulted in improved sales growth metrics in recent years. So I think the opportunity might be even better than it was during Covid-19.
Long-term thinking
Investors who can look past short-term challenges can do really well in the stock market. And I think that’s the case with dividend shares right now.
The risk for Unilever remains the prospect of customers trading down to cheaper alternatives. And that’s especially true in an inflationary environment.
The company, though, has some key long-term advantages that put it in a good position to deal with this. These include its brands and its scale.
This is why the firm has such a good record of returning cash to shareholders. And I think the chance to buy it with an unusually high yield is worth taking seriously.
