These two FTSE 100 dividend stocks have relatively low yields but that doesn’t put me off, they suggest solid, steady businesses and I’d buy them today.
Spirits giant Diageo (LSE: DGE) and consumer goods specialist Unilever (LSE: ULVR) rarely yield more than 3% a year. Yet I reckon both are top dividend and growth stocks. The main reason their yields are usually low, is that they have delivered healthy share price growth as well.
Right now, Diageo’s yield is low even by its standards, at 1.87%. That is partly explained by the fact that the Diageo share price has climbed an impressive 30% in the last year.
By contrast, Unilever’s dividend yield is relatively high by its standards, just over 4%. That’s mostly down to the floundering Unilever share price, down almost 15% over 12 months.
Low yields, high growth prospects
High dividend yields catch the eye, of course. There are some real thrillers out there right now. However to me, Diageo and Unilever’s solid, steady payouts suggest healthy businesses with strong long-term growth prospects.
Diageo recently reported a 15.8% rise in net sales to £8bn over six months, with impressive margin growth too. While inflation inevitably hurt, this was “more than offset” by supply productivity savings and price increases.
Chief executive Ivan Menezes warned of further near-term volatility. He named “potential impacts from Covid-19, global supply chain constraints and rising cost inflation”. Pausing exports to Ukraine and Russia will inevitably hit sales, but the outlook remains promising.
My major worry is that this is a bad time to buy Diageo, as its price/earnings ratio is now 32.88 times earnings. Typically, it trades at around 25 times, so that’s a premium price. Then again, it’s a premium dividend and growth stock.
Unilever has been trying to add some zip through acquisitions, but stumbled over its failed bid for for GlaxoSmithKline‘s consumer health business. It has ruled out further M&A for now, and is cutting 1,500 management jobs globally to save cash and boost operational performance.
Two of my favourite dividend stocks
Despite that, recent full-year turnover of €52.4bn beat expectations, rising 3.4%. Management anticipates underlying 2022 sales growth to range from 4.5% to 6.5%.
Investors are still being rewarded though, with the dividend per share rising 3.1% in 2021. Unilever also completed €3bn of share buybacks. By its standards, the stock is dirt cheap, trading at 15.64 times earnings (against 23 times typically). While management faces challenges, I think that makes now a tempting entry point.
These two FTSE 100 dividend heroes both have pricing power, thanks to their unmatchable array of established global brands. With Diageo, Baileys, Smirnoff, Johnnie Walker, Guinness and Tanqueray all spring to mind. Unilever’s top brands include Ben & Jerry’s, Knorr, Magnum, Marmite, PG Tips, Comfort, Domestos, Lynx, Persil and many more.
I’d buy both dividend growth stocks today, despite their wildly differing valuations. But if I could only choose one, I’d choose dirt-cheap (by its standards) Unilever.
