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I think the FTSE 100 has a number of interesting opportunities for investors looking to earn a second income. But today’s dividends are just one part of the picture.
For investors, what matters is not only how much cash a company returns to its shareholders now, but whether or not this can increase over time. And Unilever (LSE:ULVR) is worth paying attention to.
Consumer staples
On the face of it, Unilever operates in a pretty unattractive industry. Barriers to entry are relatively low, which creates risk and opportunities for growth tend to be limited.
The company, however, has some unique strengths. Its vast scale and portfolio of well-known brands give it an advantage when it comes to negotiating with retailers.
This is hard for competitors to replicate. While it isn’t particularly difficult to produce a product in most of firm’s categories, barriers to achieving scale are high.
That’s what sets Unilever apart from its rivals. And a strong competitive position in an industry that benefits from durable demand makes the stock worth considering for long-term investors.
Dividends
Over the last 12 months, Unilever has returned £1.52 per share in dividends. At today’s prices, that’s a yield of 3.28%, which is roughly in line with the FTSE 100 average.
The interesting thing about the stock from a passive income perspective, however, is how much the dividend has grown over time. Ten years ago, the dividend was 88p per share.
That means an investor looking for a £1,000-a-year second income in 2015 would have needed 1,136 shares. But increases in the dividend mean that number has now fallen to 658.
Over the last couple of years, things have stagnated somewhat, but Unilever is looking to change this. And the company installed a new CEO in March to push the process along.
Growth
Not all of Unilever’s product lines have performed equally well recently. And the plan for growth involves divesting some of its weaker lines and focusing on its stronger ones.
The most notable example is the company spinning off its ice cream division, which has been growing strongly, but has high capital requirements. This is set to complete this year.
Other parts of the strategy are less dramatic. They include focusing on social media-based marketing and looking to drive growth in key markets such as the US and India.
The early results have been more steady than spectacular, with underlying sales (excluding ice cream) growing at around 2.5%. But if this starts to accelerate, investors could do very well.
Long-term passive income
Unilever’s strategy looks like the right one to me, but investors need to be realistic. It’s hard to see underlying sales suddenly growing at 10% a year in a market where demand is stable.
This, however, probably isn’t the point. Dividends are never guaranteed, but the company has a lot of the hallmarks of a relatively reliable source of investor returns.
On that basis, I think the stock deserves serious consideration from investors looking to turn excess cash into steady income. And I can definitely think of worse investments they could make.
