In my view, Unilever (LSE:ULVR) is one of the best dividend shares around. It’s easy to assume the 96-year-old firm’s best days are behind it, but I think that could well be a mistake.
The FTSE 100 stock is the kind of investment I’m happy to make in my bid to retire early. But how many shares would I need to invest to give up work and live off the passive income?
Retirement costs
According to a recent survey from the Pensions and Lifetime Savings Association, a single person needs a minimum income of £14,400 per year to retire. For couples, the amount is £22,400.
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With Unilever currently paying £1.46 in dividends per share each year, it looks as though I’d need 9,863 shares to reach my target. At today’s prices, that would cost me £401,390.
There’s a catch though. Unless I held my investments in a Stocks and Shares ISA, I’d have to pay £1,260 in dividend taxes each year, putting me short of my £14,400 target.
To offset this, I’d need another 938 shares, which would cost me £38,204 at the current share price. Fortunately though, there’s a way for me to avoid this.
By investing through a Stocks and Shares ISA, none of my income would be eligible for dividend taxes. So I’d only need 9,863 shares for £14,400 in annual passive income.
Please note that tax treatment depends on the individual circumstances of each client and may be subject to change in future. The content in this article is provided for information purposes only. It is not intended to be, neither does it constitute, any form of tax advice. Readers are responsible for carrying out their own due diligence and for obtaining professional advice before making any investment decisions.
Growth
That’s the number of shares I’d need to reach the minimum retirement level for a single person today. And there’s no way around it – £401,390 is a big outlay.
Fortunately though, I think the equation is going to get easier over time. One reason for this is that Unilever has increased its dividend consistently in the past and I expect it to continue doing so.
Suppose the dividend grows at a rate of just 2% a year from this point. Ten years from now, that would mean £1.77 per share in dividends.
In that situation, I’d only need 8,135 shares to earn £14,400 in annual passive income. That’s a £331,598 outlay at today’s prices – still a lot, but much less than £401,390.
The more the dividend grows, the more achievable the equation becomes. The real key is whether or not Unilever can keep increasing its distributions to shareholders.
Risks and rewards
Unilever’s growth has been limited recently and the main reason for this is inflation. Higher input costs have been testing the company’s ability to increase prices and this has limits.
There’s a danger this might continue, threatening the 2% growth I mentioned. But I think there are a couple of reasons for optimism.
One is that the Bank of England is prioritising tackling inflation over boosting the economy. That’s good news for a business that sells everyday essentials, but is challenged by rising prices.
Another is the firm has been reducing its outstanding share count. As the number of shares outstanding decreases, each remaining share has a bigger claim on the cash paid to shareholders.
To my mind, Unilever shares are a great example of an investment that will likely be able to provide strong passive income in retirement. I’d be very happy buying the stock for my portfolio today.
