I think dividend shares can be a great source of passive income. And right now, there are some opportunities for long-term investors that I think might be too good to ignore, especially in the FTSE 100.
One example is Unilever (LSE:ULVR). A share price that has gone roughly nowhere over the last five years might not look particularly exciting, but a closer look reveals something much more interesting.
Dividend yield
Right now, Unilever shares come with a dividend yield of around 4%. That doesn’t sound like much, especially with similar returns available on savings accounts, but there are a couple of things to note.
One is that – excluding minor fluctuations – this is the highest the Unilever dividend yield has been over the last 10 years. For most of the last decade, the dividend yield has been closer to 3.25%.
Unilever dividend yield 2014-24
Created at TradingView
That might not seem like a lot, but it can add up over time. Over 20 years, the difference between investing £10,000 at 4% compared to 3.25% amounts to £1,500 – more than 10% of the original stake.
The other thing to note is that Unilever has a strong record of dividend growth. And the defensive nature of the business means I think this can continue for some time going forward.
With cash, the situation is different. I’m expecting the next move in interest rates to be lower, meaning that 4% returns on cash are unlikely to be sustainable over the long term.
Inflation
Sometimes, a higher dividend yield can be a sign that the stock market thinks the risks associated with an investment have increased. So is this the case with Unilever?
The company’s strength is its brand portfolio, which allows it to maintain high margins. These have compared favourably with firms like Kraft Heinz, General Mills, and Kellanova (formerly Kellogg).
Created at TradingView
A concerning trend, though, is that gross margins have been contracting since 2020. And they’ve now reached their lowest levels for 10 years.
The possibility of margins continuing to come down is a clear risk with the stock. But I think the macroeconomic outlook for the UK provides some reason for optimism.
Unilever gross margins vs. UK inflation 2014-24
Created at TradingView
A big part of the reason for Unilever’s margin contraction is the rise in inflation in the UK. In general, as input costs have gone up, margins have come down and this has been true over the long term.
Importantly, though, the rate of price increases has started coming down and the Bank of England is committed to bringing down inflation as a priority. This, in my view, is a big positive for Unilever.
A stock to buy?
I see Unilever shares as a reliable passive income investment. And there hasn’t been an opportunity over the last decade to buy the stock with a dividend yield as high as it is now.
Inflation in the UK has come back down to 4%. The last time it was at these levels, the company’s gross margins were significantly higher than they are now.
Other things being equal, higher margins mean better profitability. That’s why Unilever shares are on my list of stocks to buy next time I’m looking to add to my portfolio.
