Buying FTSE 100 shares with high dividend yields is not the only means of improving your long-term income prospects. In fact, purchasing stocks that have lower yields but relatively strong dividend growth prospects could be a sound move. In time, they could offer a higher and faster growing passive income.
With that in mind, here are two companies that could deliver a brisk rise in their shareholder payouts. They could improve your retirement income prospects – even if you are beginning your retirement plans from a standing start at age 50.
Tesco (LSE: TSCO) may not seem to be a worthwhile income share for the long term. After all, consumer confidence is weak and there is a tremendous amount of competition in the supermarket sector.
However, the company’s strategy has contributed to a significant improvement in its financial performance that is expected to continue over the long run. For example, the business has been able to cut costs, improve customer satisfaction scores and expand into faster growing areas such as convenience and online. This is expected to deliver a rise in the company’s bottom line of 23% in the current year, with a further 8% growth forecast for next year.
A rising bottom line means that Tesco could deliver an improving dividend. In fact, over the next three years its shareholder payouts are due to rise at an annualised rate of 20%. This puts it on a forward yield of around 4% next year from a payout which is due to be covered twice by net profit.
Therefore, while there are higher-yielding shares in the FTSE 100 than Tesco at the present time, the company’s long-term income growth prospects could make it an attractive investment opportunity.
Unilever’s (LSE: ULVR) recent fourth-quarter update highlighted the challenging operating conditions experienced by the consumer goods company in recent months. They contributed to the company missing its previous sales guidance for the full year, although it continued to experience relatively strong growth in emerging markets.
Looking ahead, Unilever is aiming to ramp-up its cost saving initiatives and become increasingly innovative. This could catalyse its financial prospects, and may strengthen its long-term performance.
Since the company’s share price has fallen in recent months, it now has a dividend yield of 3.4%. This is relatively attractive compared to its past levels, and suggests that the stock offers fair value for money. Moreover, with its bottom line forecast to rise by 8% in the current year and by 7% next year, it has a solid financial outlook which may lead to a rising dividend.
Beyond next year, the company’s strong position in emerging markets and its range of dominant consumer brands may mean that it is able to report rising dividends over the long run that make Unilever a highly appealing income share.
Peter Stephens owns shares of Tesco and Unilever. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Tesco. 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.