Unilever: a passive earnings inventory with potential for many years of dividend progress

Receiving and reinvesting dividends is a technique of rising a passive earnings portfolio. Over time, this could have some spectacular outcomes as the ability of compound curiosity does its factor.

Even higher, although, is discovering an organization that grows its dividend with out shareholders having to place up extra money. And I believe Unilever (LSE:ULVR) can do that for a very long time to come back.

Warren Buffett

In 1994, Warren Buffett’s funding in Coca-Cola (NYSE:KO) generated $75m in dividends. In 2022, the identical funding returned $704m in passive earnings – a rise of 838%. 

Importantly, this wasn’t the results of Berkshire Hathaway reinvesting the dividends it obtained. It was simply the Coca-Cola firm paying out extra in dividends per share. 

I don’t suppose shopping for shares in Unilever at present goes to be like shopping for shares in Coke in 1994. I could possibly be mistaken, however I’d be stunned if that turned out to be the case. 

I do, nonetheless, imagine there are some necessary similarities. And I count on these to imply the FTSE 100 firm can develop its dividend per share for many years to come back.

Share buybacks

Coca-Cola has elevated its dividend per share as a result of the underlying enterprise has grown, however this isn’t the one motive. The corporate has additionally lowered its share depend via using buybacks.

Coca-Cola diluted shares excellent 2004-24

That is necessary. Bringing down the general variety of shares means it’s attainable for the agency to extend its dividend per share even when the underlying enterprise doesn’t generate any additional cash.

In 2004, for instance, Coca-Cola distributed $2.43bn in dividends. With 4.82bn shares excellent, that quantities to roughly 50 cents per share. 

With the share depend now at 4.31bn, the identical $2.43bn would quantity to only over 56 cents per share in 2024. That’s a better dividend per share even when the enterprise as an entire doesn’t pay out extra.

Unilever’s progress prospects

Unilever doesn’t have Coca-Cola’s file in the case of buybacks. However during the last 10 years, the corporate has been steadily lowering its excellent share depend.

Unilever diluted shares excellent 2004-24

Created at TradingView

I’m not anticipating this to generate explosive progress by itself. However I believe it may be a sturdy enhance for shareholders in a enterprise working in an trade the place demand ought to develop steadily. 

The danger with Unilever is the potential of customers switching to cheaper alternate options, particularly in a troublesome financial setting. That is one thing traders ought to regulate.

The corporate’s model portfolio and the dimensions of its distribution give it a bonus over opponents, although. And I believe this makes the outlook promising for dividend traders.

Ought to I purchase Unilever shares?

I believe passive earnings traders ought to take a detailed take a look at Unilever shares. Lengthy-term progress ought to come from incremental good points, relatively than a dramatic enhance, however these can add up over time.

It’s simple to underestimate the impact share buybacks can have. Demand may fluctuate from yr to yr, however lowering the share depend ought to preserve the dividend rising constantly.