A UK dividend stock I’d buy today for passive income

Roland Head explains why he only buys UK dividend stocks and looks at a FTSE 100 share he thinks could be a brilliant buy for passive income.

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Investing in the stock market means that I’m the part owner of a number of businesses. I want to share in these companies’ profits each year, so I only buy dividend stocks.

My focus on dividends might seem unnecessary when so many non-dividend shares keep hitting new highs. But I don’t want to have to sell my shares to make money from them. I want a regular cash return, just as I would if I owned a rental property.

Today I want to look at a UK dividend stock that’s I think could be one of the best passive income opportunities for me in the FTSE 100 today.

2.5bn people can’t be wrong

Consumer goods group Unilever (LSE: ULVR) says that 2.5bn people in 190 countries use its products every day. The company also has one of the most reliable dividends in the FTSE 100, with an unbroken payout record stretching back more than 50 years.

I reckon these two facts are linked. Owning Unilever shares gives shareholders exposure to a slice of global household spending, including faster-growing emerging markets.

In the UK, popular Unilever brands include PG Tips, Magnum and Persil. Although such brands are under pressure from supermarkets’ cheaper, own-brand alternatives, customers are often very loyal to these brands. This gives Unilever a defensive moat, making it harder for competitors to take market share.

Businesses with a strong moat often have above-average profit margins, and that’s true here. Unilever’s operating margin has averaged 15% over the last 10 years. The business also has a strong record of cash generation, which has supported reliable dividend growth.

Is Unilever a has-been?

The main threat I can see to Unilever is that it must make sure its portfolio of brands remains popular and relevant. This requires constant spending on in-house product development and marketing. The firm also buys in new products and brands — acquisition spending totalled €6bn last year.

Management must also keep costs under control to protect profit margins. Keeping the whole show on the road and delivering reliable growth isn’t easy. There’s plenty that could go wrong.

The share price of this popular dividend stock has come under pressure recently, due to concerns about future growth. Unilever’s growth rate has slowed in recent years and profits fell in 2020, due to the impact of the pandemic.

CEO Alan Jope has pledged to return the business to growth, but there’s a risk that this is just the start of a longer period of poor performance.

Why I’d buy this dividend stock now

Unilever’s share price has fallen by more than 20% since peaking at 4,944p in October. This drop has pushed the stock’s dividend yield up to nearly 4%.

That’s attractive to me, but I have to remember the risks I’ve mentioned above. Is it too soon to buy?

I don’t know what Unilever’s share price will do over the short term. But as a dividend investor, my main aim is to secure reliable dividends that will grow over time.

I think Unilever meets this requirement. Management has made public its commitment to “strong cash flow and a growing dividend”. The company has a long track record of delivering on this promise.

I’m happy to accept the risk of a difficult year or two if it means I can buy Unilever shares at an attractive price.

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

Roland Head has no position in any of the shares mentioned. The Motley Fool UK has recommended 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.

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