FTLet’s start with the basics. Many companies within the FTSE 100 pay a dividend. A dividend is when a company chooses to pay out a proportion of its earnings to its shareholders. So, if you own 100 shares in a company and they pay a dividend of five pence per share, then you receive five pounds.
This can either be taken as cash (income) or used to buy more shares (reinvestment). Through the magic of compounding, this can grow the value of your initial investment year upon year. My Foolish colleague Peter Stephens wrote a guide to dividend investing earlier this year.
If this is a style of investing that I want to pursue, it is then a case of examining the FTSE 100 to see which companies pay the highest dividends, then using my £1,000 to invest in them, right? No, wrong. I don’t just want to see a high dividend yield; I need to ask a more important question.
Is the dividend sustainable?
A company health check
So, how do I answer the question ‘can the company continue to pay a dividend year upon year?’ I’m looking for a company in good financial health, which has a good record of paying and increasing dividends, and whose future prospects are bright. Applying this logic to the FTSE 100 constituents, Unilever (LSE: ULVR) seem to tick all the boxes. Indeed, earlier this month, Fool writer Rupert Hargreaves saw its shares as a good component of a stocks and shares ISA.
As a consumer goods company, many Foolish readers will be able to locate a Unilever product in their house. From Dove to Domestos, Persil and more, the list of brands under the Unilever umbrella is impressive. A Unilever product is found, on average, in seven out of 10 global homes, and used by 2.5bn people every day. Crucially, the brands aren’t as vulnerable to a recession as more cyclical goods. Importantly, 60% of group sales are in emerging markets, thus providing good opportunity for growth.
Let’s look at the track record. Over the last 38 years, FTSE 100 constituent Unilever has grown the dividend by 8% annually on average, and those returns are backed up by strong cash generation. In other words, the company is generating the cash to consistently return money to shareholders. Currently yielding around 3%, Unilever has weathered the Covid-19 pandemic well, and I see no reason to expect this to be cut. Whilst there are higher yields available on the market (WPP and Pearson, for example), I’m always placing sustainability front and centre in my decision.
Foolish final thoughts
Nothing is certain in investing, and there is an element of risk every time we dip our toe into the market. However, this risk can be reduced by following the Fool ethos of researching high-quality, long-term investments. The analysis shows Unilever has a strong past, bright prospects, and is well placed to continue shareholder payouts. In my opinion, it’s a buy recommendation with my £1,000.
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Ben Watson holds no position in any share mentioned. The Motley Fool UK has recommended Pearson and Unilever. 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.