Many companies with competitive advantages and immense scale are part of the FTSE 100. The index is composed of many of Britain’s leading companies, after all. Few companies have the necessary traits to be FTSE 100 stocks I’d buy and hold for their dividend, however. My standards are more exacting for those stocks as they would have to be pretty dependable in tough times, in my view.
Given the criteria, here are three that I’d buy.
A leading alcohol company
FTSE 100 stock Diageo (LSE: DGE) is a leader in spirits. Because it has many strong brands and scale, Diageo has competitive advantages.
Diageo has an admirable dividend history. Management has raised the yearly total normal dividend consecutively for more than two decades and the company even increased its annual dividend despite the coronavirus outbreak. As a result of the dividend raises, Diageo paid a total dividend per share of 69.88p for the last fiscal year.
Many investors expect demand for Diageo’s spirits to increase once the world fully controls the pandemic and bars fully reopen. With a considerable presence in emerging markets and pricing power given its brand strength, I think Diageo has a lot more dividend growth potential in the future.
For the stock to do well, management will have to deliver, given that it’s trading at around a forward price-to-earnings (P/E) ratio of 25.66. If the company’s results don’t meet market expectations, the stock might disappoint (and the share price will likely fall).
FTSE 100 stock for the dividend: A leading consumer staple
FTSE 100 stock Unilever (LSE: ULVR) is one of the largest consumer staples companies in the world. With a portfolio of many leading brands, good management, and marketing savvy employees, Unilever has done well in terms of selling consumers basic household products that they want to buy.
As a result of this good execution, Unilever has increased its annual normal dividend per share for more than three decades. As it stands, the company paid a total dividend of €1.61 for the year ended 31 December 2019, and the market expects Unilever to pay a higher dividend for 2020. Currently, the stock has a dividend yield of around 3.22% at its present share price.
Long term, I think there is risk if Unilever management were to make a bad deal in M&A or if the company doesn’t execute as well as the market expects. Nevertheless, given the stock’s dividend history and its competitive advantages, I’d buy the stock.
Another leading consumer staple
FTSE 100 stock Reckitt Benckiser Group (LSE: RB) is another leading consumer staple that has many of Unilever’s competitive advantages. Although it’s smaller than Unilever in many aspects, Reckitt Benckiser also has a number of leading consumer brands and a great marketing department.
Reckitt Benckiser also pays a pretty decent dividend in my view, with a dividend yield of around 2.73% at current prices. With a forward P/E of around 20, I reckon Reckitt Benckiser looks attractively priced given its defensive qualities.
Going forward, I think the increasing popularity of e-commerce will be important for Reckitt Benckiser. If management adjusts to the e-commerce trend well, I think the company could potentially have substantially more customers and perhaps more growth.
Like Unilever, however, Reckitt Benckiser management will need to execute in order for the stock to do well. If the execution or sentiment worsens, the stock could lag.
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Jay Yao has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo 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.