It’s been a tough decade for UK savers. Interest rates have remained at rock-bottom levels and it’s been impossible to earn a decent amount of interest on cash savings. Indeed, the savings landscape has been so barren that savers are actually now excited about an interest rate of 1.5%, which is currently on offer from Marcus.
The fact is, a rate of 1.5% is still very low, especially when you consider that inflation is much higher than that. The unfortunate reality is that any money earning 1.5% is actually losing purchasing power over time, making savers poorer. Not ideal, is it?
To my mind, a better investment for those looking to build up their wealth over the long term is a portfolio of high-quality dividend stocks that pay out regular cash dividends every year. While higher risk than cash savings, these kinds of stocks often have yields that are much higher than 1.5%, and many lift their dividend payouts every year, too.
Today, I’m revealing one of my favourite FTSE 100 dividend stocks. It currently offers a prospective yield of 3.2%, which is more than double the best easy-access cash savings account rate.
Unilever
When it comes to dependable dividend stocks, it doesn’t get much better than Unilever (LSE: ULVR), in my opinion. The consumer goods company owns an incredible portfolio of food and beverage, personal hygiene, and cleaning products brands such as Lipton, Domestos and Dove, and this enables the group to generate consistent revenues and cash flows year after year.
The beauty of Unilever is that no matter whether the global economy is booming or contracting, you can be sure that people all over the world (2.5bn per day) will be using its products. And with around 60% of its sales now coming from the world’s emerging markets, where wealth is rising rapidly, there’s a long-term growth story that’s hard to ignore.
Dividend growth machine
While Unilever’s yield of 3.2% is not the highest in the FTSE 100, the company’s track record of consistently increasing its dividend payout is excellent, with the payout increased by an inflation-beating 8% per year since 1952, on an annualised basis. And the company has a reasonable level of dividend coverage, too (1.5 times last year) indicating that even if profits did dip in the short term, the dividend would still most likely be sustainable.
Valuation
Looking at ULVR’s valuation, the stock currently trades on a forward-looking P/E ratio of 20.8. Some people will tell you that’s expensive, because the rule of thumb with P/Es is that a figure over 15 is expensive, while anything under 15 is cheap.
Yet when you consider Unilever’s consistent earnings power, its dividend growth history, and the emerging markets story, perhaps it’s actually not so expensive after all. If Warren Buffett – one of the world’s best investors ever – tried to buy the company last year at a similar price, maybe the current share price actually offers long-term value? Ask top UK portfolio manager Nick Train, who’s often referred to as Britain’s Warren Buffett, and he’ll tell you that “exceptionally rare” companies such as Unilever can justify P/E ratios of 30, or higher.
As I mentioned earlier, shares are higher risk than cash savings. Yet given the choice of 1.5% from a savings account, or a 3.2% dividend yield growing at around 8% per year, the choice, from a long-term investing point of view, is clear, in my opinion.