This Week’s Top Blue-Chip Income Buy: Unilever plc

I’m always on the lookout for big FTSE 100 companies when they’re being offered in the market at an attractive valuation for dividend investors.

A little higher yield at the time you buy can make a big difference to the growth of your income stream over the long term. Right now, I reckon Unilever (LSE: ULVR) (NYSE: UL.US) is looking a great buy for income.

A different kind of income share

Income investors tend to gravitate towards shares offering a high yield. It’s natural enough. After all, a chunky starting income is attractive.

Sometimes, though, a high yield can signal lower dividend growth or, on occasion, an impending cut.

Which is why I think there’s always room in an income portfolio for a few companies that tend to have a more average yield, but also a history of good, steady dividend growth. Companies such as Unilever.

As this type of share doesn’t offer the biggest starting income, I think it’s even more important than usual to squeeze out a bit of extra yield by buying at an opportune time.

Exchange rates boosting dividend growth

Anglo-Dutch group Unilever reports and declares dividends in euros, and pays four equal dividends a year. For investors who take their dividends in sterling, exchange rates come into play.

During 2011 and 2012, exchange rates worked against sterling investors, who saw income increases of 6.9% and 3.7%, respectively, compared with 8.2% and 8.0% rises in the euro payout.

However, exchange rates have lately been swinging in favour of sterling. While the euro dividend for the first two quarters of this year increased 10.7%, sterling investors have seen rises of 15.6% and 22.2%.

Fall in share price; rise in yield

Unilever is famed for its exposure to fast-growing emerging markets. Some 57% of group revenue comes from these economies, and that’s expected to soar to 70% by the end of the decade.

In recent months, investors have become concerned about less dynamic growth from emerging markets. Unilever itself said within a trading update just this week that the company has seen “weakening in the market growth of many emerging countries in quarter three”.

The current fears of the shortsighted stock market have pushed Unilever’s shares down 20%, from a high of 2,885p during May to 2,319p at the time of writing.

As a result of the drop, and a strong second-quarter sterling dividend, the trailing 12-month yield has risen from 2.8% to an above-market-average 3.7%. Hence, I rate Unilever a great buy for long-term income investors right now.

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G A Chester does not own any shares mentioned in this article. The Motley Fool has recommended shares in Unilever.