Dividend stocks play a role in my retirement planning. By purchasing them now, I hope I can generate extra income in the years before I retire.
But I also think it could be good to own such shares when I do retire. They could provide a regular source of income to help top up my pension. Here are a couple of dividend shares I would buy now with an eye on the future, if I had spare cash to invest.
British American Tobacco
Tobacco is an industry in long-term decline. However, that has been true for decades and may continue to be the case for many more more. Meanwhile, it throws off huge cash flows that enable cigarette makers to pay out chunky dividends.
One of these is British American Tobacco (LSE: BATS), a company whose shares I already own in my pension. It is the multinational giant behind brands such as Lucky Strike and Pall Mall. Its business is dominated by cigarettes but in recent years it has been expanding its non-cigarette business at speed. It expects that to break even in 2025.
The company pays quarterly dividends. It has raised its payout annually for over two decades. At the moment, the shares have a dividend yield of 6.5%.
For now, at least, I think the company will keep increasing its annual payout. However, if falling cigarette sales hurt profits badly, the dividend may be cut. That is a risk with all dividend stocks as payouts are never guaranteed.
Unilever
Another share I would happily put into my portfolio now with an eye on the long-term future is consumer goods giant Unilever (LSE: ULVR).
Dividend stocks rely on strong cash flows to keep paying out. Typically, a business might be able to keep paying out despite a bad year or two in its business. But over time, to keep returning cash to shareholders, a business needs to generate surplus capital.
I think Unilever is well-positioned to do that. In its most recent year, for example, the company generated €6.4bn of free cash flows. That enabled it to pay out €4.5bn in dividends while keeping some spare cash to reinvest in the business.
Long-term business model
I reckon the business can keep generating strong cash flows for decades to come. Its focus on everyday products, from soap to bleach, means that demand for Unilever product should remain high. Indeed, the company estimates that a staggering 3.4bn people use its products every day. That is around 44% of the world’s population.
I expect demand to remain high, although growing environmental awareness among consumers could lead some to buy fewer packaged goods, hurting sales.
Pricing power
But addressing a big market is only one part of success. Rivals can also try to benefit from it, hurting profit margins.
That is where Unilever’s portfolio of premium brands such as Dove and Magnum come into play. They give it pricing power. That has come in handy lately as the firm battles inflation, which remains a risk to profits. But, so far, Unilever has largely been successful in pushing up its own selling prices to offset rising costs.
With a 3.5% yield, I would be happy to use some spare cash to buy Unilever shares for my pension.
