If youre relying on investment income, high dividends are obviously very nice. But you need to balance them with safe and reliable ones too it could be a bit of a blow if a lot of your investments are forced to cut their dividends at the same time. And what could be safer than companies selling in-demand consumer products to a worldwide market and thatmaintain a good level of dividend cover?
Wash and save
Take Unilever (LSE: ULVR), which includes a multitude of household and personal cleaning brands in its product portfolio. And though the market seems very competitive, you might be amazed by how many apparently-competing brands are actually owned by Unilever itself.
Unilever is on a forecast dividend yield of a little over 3% on shares priced at 3,106p, which is pretty much in line with the FTSE 100 average, and it has a habit of growing its dividends ahead of inflation over the long term. As an aside, you might wonder why buying a FTSE tracker fund wouldnt achieve the same result but over the past five years, Unilever shares have also risen in value by 65% while the FTSE has managed a measly 5%.
Unilevers dividend tends to be covered around 1.5 times by earnings, which seems plenty for the kind of business its in, especially as the company generates oodles of free cash. The shares are on a relatively high P/E of around 20, but investors are prepared to pay more for reliability and safety.
Drinking to success
Diageo (LSE: DGE) is another operating in a very reliable market whether people are celebrating success or drowning sorrows, the world is just not going to stop quaffing Johnnie Walker whisky, Smirnoff vodka, Guinness stout, Rumple Minze, erm, stuff and all the rest.
Dividend yields are about the same as Unilevers, again with a little over 3% expected from the 1,865p shares, the payouts are rising steadily every year, and cover by earnings is around that familiar 1.5 times level.
Weve got strong cash generation, dividends growing ahead of inflation, a 57% share price rise over five years, and a premium P/E valuation of around 20 I think Im seeing a pattern here. Yes, Diageo is another cornerstone of many an income portfolio for exactly the same reasons as Unilever.
Like it or lump it, the world isnt going to give up its noxious tobacco habit any time soon, and thats helping British American Tobacco (LSE: BATS) to keep paying out dividends yielding better than 4% on shares trading today at 3,958p.
Western nations might be slowly turning their backs on the weed, but there are billions in developing countries who cant get enough of the stuff and who are increasingly going to be moving to higher-margin upmarket brands as their wealth improves. Its no surprise that analysts are forecasting EPS growth of 9% this year followed by 8% next, and that dividend rises are again regularly keeping way ahead of inflation.
If you smoke British Americans products, well, they might kill you. But if you invest in the shares too, at least you should be able to afford a lavish funeral. Or just buy the shares and dont smoke!
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Alan Oscroft has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Diageo. We Fools don’t all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.